The Federal Reserve will do what it can to prevent a tapered tantrum when it finally decides to reduce its bond purchases, the minutes of the central bank’s latest meeting showed on Wednesday.
After a two-day session of December 15-16, the Federal Committee on Public Markets decided to keep its interest rate near zero at short notice.
However, markets were focused on discussions surrounding the Fed’s asset buying program. The central bank has backed at least $ 120 billion in taxes and bonds each month, and at the meeting it promised to continue to do so until it sees “significant further progress” toward its inflation and employment targets.
Minutes gave unanimous approval of the ‘outcomes-based’ approach to the program, although members noted that this does not mean that the purchases will be linked to specific numerical objectives.
Officials have agreed that markets will gain enough knowledge before restricting asset purchases. The last time the Fed cut its asset purchases, it caused a “taper tantrum” in the market that officials want to avoid this time around.
“Several participants noted that it was important for the committee to clearly communicate its assessment of the actual and expected progress towards its long-term objectives ahead of time that it would be significant enough to justify a change in the rate of purchases,” said.
Members further noted that once the threshold for ‘significant further progress’ was reached, the contraction in purchases would be ‘gradual’ and following the line taken by the Fed in 2013. During the previous reduction in purchases, the Fed reduced the amount it bought each month. Later, it allowed a limited return from the bonds he still held to roll off each month while the rest was reinvested.
The expectation was that the committee would accelerate the pace of purchases or extend the commitment. The latter step would be an attempt to stimulate the economy by lowering interest rates.
Although the markets looked at how many favorite committee members had to adjust the duration of the purchases, it was noted in the minutes that only a few ‘officials indicated that they were’ open ‘to the idea of buying bonds with a longer date.
Also during the meeting, members adjusted their economic estimates for the next few years. On balance, the committee became less pessimistic about economic growth than it was in September, lowering projections for the unemployment rate.
Officials noted that the economic data around the time of the meeting was mostly better than expected, but the accelerated distribution of Covid-19 was a challenge and growth in general remains significantly below the pre-pandemic level.
“They noted that the economic recovery has so far been stronger than expected – indicating greater momentum in economic activity than previously thought – but view the recent indicators as a sign that the pace of recovery has slowed, “read the minutes. “With the worsening pandemic across the country, the expansion is expected to slow down even further in the coming months.”
There was virtually no change in the statement after the previous meeting, other than the language surrounding the purchase of assets.