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Fed staff set a reduction path of $ 15 billion / month

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Highlights from the FOMC report:

  • Four mentions of transient inflation, of which “staff continued to expect this year’s rise in inflation to turn out to be transient”
  • 8 mentions of tapering, including a preview of the path
  • No decision to phase down was taken at the meeting.
  • Participants generally felt that if the recovery stays on track, a phased down ending around the middle of next year would likely be appropriate.
  • The reduction process could start in mid-November or mid-December

The illustrative reduction path was designed to be simple to communicate and resulted in a gradual reduction in the pace of net asset purchases which, if started later this year, would lead the Federal Reserve to end purchases towards the middle of next year. The path has featured monthly reductions in the pace of asset purchases, $ 10 billion in the case of Treasury securities and $ 5 billion in the case of mortgage-backed securities (MBS). Participants generally observed that the illustrative path provided a simple and appropriate model for decision-makers to follow, and a few participants observed that giving the general public advance notice of a plan in this direction can reduce the risk of an unfavorable market reaction to a moderation in asset purchases. Participants noted that, in accordance with the results-based standard for initiating a decrease in asset purchases, the Committee could adjust the pace of moderation in its purchases if economic developments were to differ significantly from what they expected. Several participants indicated that they preferred to moderate purchases faster than described in the illustrative examples.

Interestingly, apparently no one was in favor of a slower rate of reduction.

Following:

There is more clarity here than I expected around the cone. I think it’s safe to price a $ 15 billion monthly taper now. This roughly matches the Fed’s expectations and signals and would mean an 8-month decrease, starting in November or December.

The inflation rhetoric matches what Fed officials have said in public.

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