Fed supports 2013 tapering but scale could be less than feared

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The minutes of the latest Federal Reserve monetary policy meeting suggest the central bank will start to slow the pace of quantitative easing this year although experts argue that the cut could be smaller than expected.

Officials at the Federal Open Market Committee’s July meeting were “broadly comfortable” with starting to taper the Fed’s $85bn-a-month bond-buying programme this year if the US economy continues to strengthen in the months ahead.

“Members judged that a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” the minutes say.

“Almost all committee members agreed that a change in the purchase program was not yet appropriate. At the same time, a few others … suggested that it might soon be time to slow somewhat the pace of purchases.”

The Dow Jones dropped more than 100 points after the minutes were published last night, then quickly recovered before seeing another sell-off to end the session down 105.44 points at 14,897.55. This morning, both the FTSE 100 and the Euro Stoxx 50 advanced after opening.

Capital Economics chief US economist Paul Ashworth says the minutes suggest the Fed is on track to start tapering QE at its next FOMC meeting in mid-September, although this timetable is “far from a certainty”.

“Nevertheless, with the FOMC still split on when to start the taper we suspect that, as a compromise, officials could opt to start the taper next month but begin with a smaller than expected initial reduction of $10bn,” he adds.

CMC Markets senior markets analyst Michael Hewson notes that the markets have not been given any certainty about the timing of tapering and suggests it would be “premature at best” to assume it would begin in September.

“It would therefore seem safe to conclude that the economic data between now and that meeting on 17 and 18 September will dictate not only the timing, but also the initial amount, whether it be $10bn or $20bn,” he says.

“With the health of the jobs market at the forefront of the Fed’s thinking it therefore seems safe to assume, if you can assume anything in these markets, that the August payrolls report and the ISM will be key factors in any decision with respect to these two factors.”