U.S. equity futures for all three major indexes are all pointing higher near 1 percent following the release of Fed minutes on Wednesday which revealed that the majority of Fed members from the Federal Reserve Committee during the June Fed meeting still want to see the labor market substantially improve before the Fed gradually tapers their bond purchases with its monetary stimulus program.
According to the released Fed minutes, the Committee will maintain its $85 billion monthly bond buying program, known as Quantitative Easing (QE III), and closely monitor incoming U.S. economic data in the months ahead before deciding if the time is right for the Fed Reserve to taper its pace of bond purchases aimed at driving down interest rates and stimulating the U.S. economy.
With inflation still well below the Fed’s 2 percent target and the U.S. unemployment level remaining in sleep mode at 7.6 percent, the Fed Committee may not be ready to reduce their quantitative easing program and slowly exit the accommodative track.
Following the release of June Fed minutes and Bernanke’s press conference, the U.S. dollar fell the most in a month against a basket of major currencies.
Data Dependent and Remaining Accomodative
In mid-June U.S. equities pulled back 3-5 percent from their May highs following comments from Fed Chairman Bernanke which suggested the Fed could begin to ”moderate” or taper its bond purchases later this year and end it outright in 2014, if its forecasts for inflation moves to their 2 percent longer term goal and the unemployment rate falls to around 7 percent as Fed policymakers forecast.
The June Fed minutes released yesterday suggests that Committee members are not quite ready to chose a precise month when the tapering will unfold and would rather analyze a batch of monthly economic data for final confirmation about the timing for their tapering response.
“The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability” the Fed stated.
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens” the Fed stated in a later passage.
Fed committee members last convened in mid-June before the June’s employment report was released which showed a stronger than expected 195,000 non-farm payroll jobs report coupled with the April and May non-payroll numbers being revised higher by 70,000 combined jobs.
Whether that upward job payroll trend remains intact for the rest of 2013 remains to be seen, especially when measured alongside a mostly weak inflationary environment and fiscal drag from sequester cuts.
Bernanke commented on Wednesday to reporters that he was concerned about the low inflation level and suggested that it’s still too early to know if the U.S. economy can endure the headwinds from fiscal policy (E.G. sequester cuts and tax increases).
Bernanke drew some distinctions between the Fed’s quantitative asset purchases with QE III and the rest of their monetary easing tools, making it clear that the Fed won’t consider raising short-term rates until the unemployment rate reaches 6.5%
Ralph Schlosstein, President and Chief Executive Officer of Evercore Partners, was questioned today on Bloomberg’s Countdown about when the Fed will begin to taper and raise rates.
“The first…. I think is 100 percent dependent on the path of the economy. There is not a time, there is a strong, self-sustaining private economy” Schlosstein said. “When that happens, the Fed will start to taper QE III” he concluded.
The Fed announced in their June (FOMC) Fed meeting that they expect the U.S. unemployment rate in 2013 to hover between 7.2 – 7.3 percent versus their earlier March’s forecast of 7.3- 7.5 percent.
The Fed expects 2013 GDP growth between 2.3 – 2.6 percent and 3.0- 3.5 percent in 2014.
On July 9th the International Monetary Fund (IMF) released a World Economic Outlook that showed a lowered estimate for U.S. GDP in 2013 which is projected to rise from 1.75 percent in 2013 to 2.75 in 2014, based on the estimation that sequester cuts will remain in place until 2014.