Threshold to Taper Not Yet Met, but Fed Sees Progress Ahead: Fed Minutes

© Reuters.

By Yasin Ebrahim

Investing.com – Federal Reserve policymakers generally agreed that the threshold to begin scaling back its monthly bond purchases had not yet been met, but expected progress on the conditions to taper to continue amid an improving economic backdrop, according to the minutes of the Federal Reserve's June meeting.

"The Committee's standard of 'substantial further progress' was generally seen as not having yet been met, though participants expected progress to continue," the minutes showed. "Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data."

At the conclusion of its previous meeting on June. 16, the Federal Open Market Committee kept its benchmark rate in a range of  0% to 0.25% and the pace of bond purchases at a $120 billion monthly.

While the unchanged monetary policy was widely expected, the central bank brought forward its projections for when the liftoff in rates will get underway. It hinted at two rate hikes in 2023, and signaled higher odds for a first hike coming as early as 2022.

The somewhat hawkish tilt caught many by surprise, and brightened the spotlight on tapering.  Fed chairman Jerome Powell confirmed that the topic tapering had been broached at the June meeting, dubbing it the "talking-about-talking-about meeting."

Fed members engaged in debate about how much progress the economy has made toward the central bank's "sustainable further progress" threshold to trigger a taper of its monthly bond purchases.

The recovery in the labor market appears to be the heart of the Fed's taper threshold, with Powell waxing lyrically about the prospect of further job gains to come later this year, forecasting that the current labor supply issues are likely to wane.

"I think it's clear, and I am confident, that we are on a path to a very strong labor market," Powell said in the post-Fed meeting press conference on June 16. "I would expect that we would see strong job creation building up over the summer and going into the fall."

While a clearer picture on the timing of tapering isn't expected until September, some on Wall Street believe the monetary policy pendulum has swung toward the Fed tightening sooner rather than later.

"We expect it [Fed] to provide forward guidance in September and announce tapering at the end of 1Q22, one quarter later than consensus," Morgan Stanley (NYSE:MS) said. "There are inherent uncertainty bands around this view and given the speed of the labor market recovery I would place the risk of a sooner than later start to tapering," Morgan Stanley Economist Ellen Zentner said in a note.