FOMC MINUTES - UNCERTAINTY ON TIME AND AMOUNT OF EASING CONTINUES
By Ruma Dubey
“The FOMC minutes show broad support for Bernanke tapering timeline.”
That was the Breaking News on the minutes of the FOMC meet which was held on 30th and 31st July. The news was that most Fed officials at Fed were comfortable with Bernanke’s plan to start tapering Q2 before the end of this year, if the economy improves. The interesting part is that despite the headlines, the minutes indicate that four out of the seven members preferred to wait for some more time before the beginning the tapering; felt “a change in the purchase program was not yet appropriate.” At the end of this, we continue to live in uncertainty – the certainty of tapering is there but uncertainty on timeline continues.
If one may recollect, in June the Fed had said for the first time that it may "moderate" its pace of bond buying later this year and may end QE by around middle of 2014. And later in July, the Fed had attached some conditionality’s to this tapering:
- To continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month
- Fed’s commitment to hold the target interest rate near zero as long as the jobless rate remains above 6.5% and inflation does not rise above 2%.
- Inflation persistently below its 2% objective could pose risks to economic performance; anticipates that inflation will move back toward its objective over the medium term
So is there a timeline given in the minutes? That uncertainty still remains and there was no word on when exactly this would start. Word on the street (Wall Street) is that FOMC might start the easing at its Sept 17-18 meeting. And what about the amount of easing? Currently the Fed prints $85 billion per month and here, the various opinions are divided – with some saying it could be halved to around $40-45 billion per month while some say it could be around $70-75 billion per month. The latter is too sharp and seems unlikely.
The minutes did discuss methods and means to start the easing and there was a suggestion of a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. This tool, it was stated would allow the FOMC to offer an overnight, risk-free instrument to a wide range of market participants and help improve the ability to keep short-term rates at desired levels.
Post the release of the minutes, US stocks fell, Treasury rates fell and yields went up. But after some time, looks like the US markets gave this some thought and decided to look at this tapering as a positive sign for the economy bouncing back and the stocks also bounced back!
So what does this mean for the Indian markets? Well, QE tapering is inevitable but we will still continue to live in this uncertainty. The Fed is not in a rush to start easing and logically, if it were to start from September, which is less than a month away, there would have been indications to that effect in the July meet. But the market has pretty much formed a mind set for September tapering and if at all that happens, it could be in the range of $20-25 billion. For us, this tapering does not signal any improvement in our economy.
Thus weakness on account of this prolonged uncertainty will continue for the Indian markets - equity as well as forex. A goalpost of Rs.70 is now being set by many forex analysts in the days and months to come.