June FOMC Minutes Preview

TIME AND DATE
14:00 EST, Wednesday 10 July 2013: Fed releases minutes from June 18-19 FOMC meeting

16:10 EST, Wednesday 10 July 2013: Fed chairman Bernanke speaks on economic policy in Boston

EXPECTATIONS
This Wednesday, traders will be focusing on the release of the June FOMC minutes, and a speech by Fed chairman Ben Bernanke scheduled for later in the day. The market will be looking for more information on the Fed’s plans to curb asset purchases – specifically, when tapering will begin. And they’ll also be interested in Bernanke’s reaction to the positive unemployment data released last Friday.

There are other aspects the Fed must consider besides when to taper, as noted by Chris Tevere, senior currency strategist at forex.com:

“What to taper – Treasuries, MBS or a combination of the two?

How to taper – According to a schedule, by assessing economic data or via numerical threshold criteria?

Pace of tapering – Reduce by a smaller, but consistent, amount per meeting ($10-15B) or a larger amount ($35-50B) followed by a pause?

Asset duration – Curb longer-dated assets first or equally weighed throughout the curve?”

Here’s a reminder of what happened a couple of weeks ago:

STATEMENT
- Maintains $85B/month pace of purchasing treasuries and mortgage backed securities (MBS)

- Holds rates at 0-0.25% as long as the unemployment rate remains above 6.5% and inflation expectations remain below 2.5%

- “Sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall”

- “Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable”

- Two dissenters: Esther L. George (concerned that high level of accommodation increases risks of future imbalances and could cause increase in L-T inflation expectations) and James Bullard (Committee should signal willingness to defend its inflation goal in light of latest inflation readings)

SUMMARY OF ECONOMIC PROJECTIONS
- GDP: 2.3 to 2.6 (from 2.3 to 2.8 March projection)

- Unemployment rate: 7.2 to 7.3 (from 7.3 to 7.5 March projection)

- PCE inflation: 0.8 to 1.2 (from 1.3 to 1.7 March projection)

- Core PCE inflation: 1.2 to 1.3 (from 1.5 to 1.6 March projection)

PRESS CONFERENCE
- “If the incoming data are broadly consistent with [the Committee’s] forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year”

- “And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear”

- “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent”

- “The current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded”

COMMENTS FROM FED OFFICIALS SINCE THE STATEMENT
Fed’s Powell, 02-Jul

The Fed’s easy monetary policy will likely be warranted for “quite some time”

Fed’s Dudley, 02-Jul

The Fed’s asset purchases could continue at higher pace than Bernanke outlined if growth, labour market slower than expected

Fed’s Williams, 28-Jun

“It’s still too early” for the Fed to cut back or end its bond-purchase program

If inflation continues to run low, the Fed might need to add more stimulus, all else equal

Fed’s Lacker, 28-Jun

September is one of the possible meetings at which the Fed could taper bond purchases, but it will depend on the data

Fed’s Stein, 28-Jun

Fed needs to consider accumulated economic progress since launch of QE3 as it considers reducing purchases

Benefits of asset purchases have surpassed costs including financial-stability risks

Fed’s Lockhart, 27-Jun

Pace of Fed bond buying depends on economy; no predetermined pace of reductions and no fixed end point

Fed’s Powell, 27-Jun

In all likelihood, expects bond buying to continue for some time

Stresses importance of data over date; Fed could delay taper if economy weaker, or even increase purchases

Fed’s Dudley, 27-Jun

QE3 would continue at higher pace for longer than Bernanke’s timeline if growth, labour market miss FOMC forecasts

First rate rise a long way off; could come well after 6.5 pct unemployment is reached

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