• FOMC Minutes slightly pried the door open to talking about tapering
  • More officials than expected say it’s conditional upon data over coming meetings…
  • ...but few of them get a vote this year
  • Treasuries sold off and the dollar rallied

Apparently, they did discuss tapering at the April 27th–28th FOMC meeting and a greater than expected number of committee participants are placing significant conditionality on incoming data over coming months before potentially opening the door to tapering. By my take, the minutes (here) convey new information that is material. Markets agreed as the US 10 year yield jumped by about 3bps, 2s10s steepened a bit and the USD rallied before covering may be settling in while the S&P slipped a touch.

The key is this passage which slips in at the end of the participants’ discussion:

“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

Recall that the Fed’s counting words that are used in the minutes go in this order: one, a couple/two, a few, a number of, several, some, many, most, almost all, all but one, generally all or consensus.

That doesn’t mean tomorrow. It’s not the June FOMC and probably not the July FOMC. It’s not necessarily going to result in consensus on when to taper any time soon as opposed to starting the process of talking about it. But it’s a sign and one that might differ from the impression Chair Powell had left us with depending upon how literally you take his words at the last presser.

I had thought that ‘one’ or ‘a couple’ might have stepped forward to indicate they were open to adjust (ie: in this case reduce) purchases depending upon incoming data over coming months. Maybe even ‘a few’ might have done so, but to say ‘a number’ is a greater than expected representation of such leanings on the committee albeit one that is not weighted toward voting status this year.

Recall that during the press conference to the April meeting, Chair Powell was very quick to say 'no' when asked if it was time for the FOMC to "start talking about talking about tapering". He said "we've said we would talk well in advance and it is not yet time to do so. We still need substantial further progress which will take some time to achieve." Maybe that’s still accurate in that technically there is still no open and clear discussion on the merits and timing of tapering, but it left one with the impression coming out of the last FOMC meeting that they didn’t even remotely broach the topic. Well, they did.

In fact, note his use of ‘we’ throughout, that they didn’t even discuss it. Apparently they did as we’ve learned about somewhat further from the comments issued by FOMC officials since the meeting. Going in, we really only knew that Dallas Fed President Kaplan supported tapering. Maybe St. Louis Fed President Bullard, Governor Waller and possibly Atlanta Fed President Bostic were indicating conditionality of such a view on data over coming months if we stretch it somewhat.

Overall, I think the minutes may have opened the door to the second half discussion toward delivering a taper by Q1 that has been our view for a long time. I wouldn't say this is a big surprise in that the conditionality surrounding the monitoring of several months of payrolls and inflation data was a reasonable expectation and some Fed speakers have said it will take a few months to get 'cleaner' data. But it's a step.

So now, are the minutes stale? I think so, but it partly depends on whether you point to nonfarm or inflation as they went in opposite directions relative to expectations since the FOMC meeting. *If* nonfarm starts accelerating with inflation pressures hanging in then maybe by the virtual Jackson Hole or the September meeting the dialogue will heat up. The July FOMC is likely too soon in my opinion because they’ll only have a couple more prints for jobs and inflation by then and may need more than that alongside vaccinations and case data plus possible constructive developments in the US fiscal policy dialogue.

So overall, they/we are all data dependent and watching the string of upcoming reports and vaccinations over coming months. Big surprise there. But a) they did indeed discuss tapering if only loosely, and b) there are perhaps more FOMC officials than publicly indicated who are placing pretty high conditionality on a taper decision around upcoming reports. Given the way the Fed tiptoes around a bias shift I would take that as a sign that FOMC discussions will be getting much livelier if data and events unfold favourably in terms of the Fed’s dual mandate over the summer. 

DISCLAIMER

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.

Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.

Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.

This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.

™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.

Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.