It was reported in the Summary of Economic Projections (SEP) section of the Minutes that about half of policymakers want to wind down QE altogether by the end of this year, even faster than what the Chairman suggested in his post-meeting Q&A session in June. Policymakers are concerned about the costs associated with quantitative easing, and wish to rely almost exclusively on forward rate guidance as the main policy tool.
Given this urgency, it thus seems odd that the costs of QE were only briefly mentioned in the summary of the policy discussion. Indeed, most of the discussion was centered on why not to taper; inflation is well below target and policymakers are still not happy with the pace of payroll growth. Indeed, many policymakers indicated that they would only be in favor of dialing back QE if there is further improvement in the outlook for the labor market.
Is there really enough time to make a judgment on the labor market, and then to fully taper QE by the end of the year? The plan doesnt seem to fit together very well.
Cutting through the messy communications, we interpret the statement in the SEP as signaling that tapering will be announced at the September meeting, unless the economic data suddenly nose-dives in the coming weeks. Inflation does not appear to be a factor in the QE decision.
At the same time, policymakers must be concerned about the surge in borrowing rates since the June meeting. There is a good chance that the FOMC will combine the tapering announcement with a reduction on the threshold unemployment rate used in the forward rate guidance, perhaps to 6% from 6.5% currently. This would underscore that tapering is not tightening and push back expectations for the fed funds rate lift-off date.
The upshot is that the Treasury selloff is probably over for now, and yields will drift lower over the summer as oversold conditions are unwound. Longer-term, the outlook for Treasurys remains negative since we expect real GDP growth to accelerate to an above trend pace late this year and into 2014.