FOMC Minutes Show Broad Support for Bernanke Taper Timeline
Comment of the Day

August 21 2013

Commentary by David Fuller

FOMC Minutes Show Broad Support for Bernanke Taper Timeline

Here is the opening for this topical article from Bloomberg
Federal Reserve policy makers were "broadly comfortable" with Chairman Ben S. Bernanke's plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting show.

"Almost all committee members agreed that a change in the purchase program was not yet appropriate," and a few said "it might soon be time to slow somewhat the pace of purchases as outlined in that plan," according to the record of the Federal Open Market Committee's July 30-31 gathering released today in Washington.

"A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases," the minutes show. "Almost all participants confirmed that they were broadly comfortable" with the committee moderating "the pace of its securities purchases later this year."

Debate among Bernanke and his colleagues over when to taper $85 billion in monthly bond buying has roiled financial markets from Jakarta to Mumbai to New York. Some Fed officials have said the bond purchases, while helping reduce unemployment, are stoking excessive risk taking in assets such as junk bonds and leveraged loans.

David Fuller's view The headline above helped to roil Wall Street today, with the DJIA swinging more than 140 points from 7pm (GMT) after the FOMC minutes were released, as you can see from this intraday chart of the Dow.

Further to some of my own comments on Mr Bernanke's view recently, not least in Tuesday's Audio and also The Weekly View's assessment posted yesterday, Mr Bernanke is under no market pressure to commence tapering. After all, the US economy and the global economy are soft, reported inflationary pressures are below the Fed's target, unemployment is only declining slowly, and the rise in long-dated government bond yields (weekly & daily) represents monetary tightening driven by the markets.

However, we also know that there is disagreement at the Fed, as some members feel that quantitative easing (QE) has persisted for too long and is distorting rather than benefiting the economy. This is not surprising given that QE is a radical departure from previous Fed policies. Therefore, my own view is that if Mr Bernanke begins to taper QE in September, it will be for political rather than the economic targets he has previously cited. The stock market might not like that prospect because there is no compensating sugar high in the form of a "substantial improvement" in economic data which Mr Bernanke has been waiting for.

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