FOMC Minutes: Has the Latest Data Accelerated the Taper?

The last meeting of the Fed wasn’t much of a market shocker. However, a lot has changed since then. Investors might be interested in scrutinizing the comments made by Fed officials at the meeting to see how they hold up in the current context.

The big question now is how much inflation will the FOMC be willing to tolerate as they keep pumping in stimulus.

Last week, core inflation – which is what the Fed tracks to determine policy – came in at 3.0%. That’s the upper band of what Fed officials have said they would tolerate even in the “temporary” suspension of their target, as part of achieving long-term price stability.

And, this is without considering the massive increase in home princes in the same period.

It’s still all about the jobs numbers

Following the last meeting, Chairman Powell insisted that it was too soon to consider tapering the Fed’s asset purchases. Currently, they are averaging $120B a month, constantly pushing the balance sheet to new records.

Powell also pointed out that the US was still 8.5M jobs below the pre-pandemic level. This was record low unemployment at the time; not exactly a plausible objective in the near term.

The April NFP was not only a disappointment, coming in at a quarter of expectations, but the prior month was revised as well. Even though the report showed 266K jobs added, in reality, the US only “recovered” 146K jobs, if we consider the revisions to prior months.

That’s a bad number even during normal times.

Where to look for guidance

From the last meeting, the US has gone from needing to create 8.5M jobs to needing to create 8.4M. Hardly moving the needle at all. This puts the Fed in a really complicated space, with inflation rising, but needing to fulfill their dual mandate of also supporting job growth.

Perhaps, in part considering the latest jobs numbers, the Biden Administration has moved to lift restrictions of mask-wearing on people who have been fully vaccinated.

While many states have moved to open, others remain hesitant due to the level of vaccination not increasing to herd immunity levels. Stimulus to push the economy forward isn’t going to do more than raise prices if supply doesn’t rise to meet demand.

With stores still closed out of fear of the virus, supply will likely remain constricted.

So, about that taper

This uncomfortable position for the Fed has led some analysts to speculate that they could take an unorthodox approach to dealing with the situation.

Some analysts speculate that a potential rate cut could be in the works, as the amount of deposits the Fed holds for banks has reached record highs. There is little point in stimulus if people aren’t borrowing.

So, any members who might have commented on a potential reversal of the jobs numbers might get extra attention. Especially since that’s the scenario that appears to be playing out. And the second thing is just how much leeway is the Fed willing to give to inflation.

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