Fed officials discussed timing of tapering asset purchases during June meeting, minutes show

During its June policy-setting meeting, the Federal Reserve inched closer toward a discussion over when to start curtailing its massive monetary support for the U.S. economy amid signs of a rapidly strengthening recovery and an unexpectedly large jump in inflation.

Minutes from their June 15-16 meeting, released Wednesday, revealed that officials had discussed how and when to start unwinding their support – even as they reiterated that they were not ready to start pulling back on their $120 billion in monthly asset purchases.

While they said they had not yet seen "substantial further progress" on tapering purchases, officials generally agreed that, "as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than-anticipated progress" toward the Fed’s inflation and employment goals.

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The U.S. central bank voted unanimously in June to hold the benchmark federal funds rate at a range between 0% and 0.25%, where it has been since March 2020, when COVID-19 forced an unprecedented shutdown of the nation's economy. Officials also said they would keep purchasing $120 billion in bonds each month, a policy known as "quantitative easing" that's designed to keep credit cheap.

But updated economic projections released by the Fed show that officials expect to raise rates twice, to about 0.6%, by late 2023, sooner than they anticipated in March – an unexpectedly hawkish shift. Thirteen of the 18 Fed officials at the meeting said they expect to start lifting rates sometime in 2023, while seven of the policymakers penciled in a rate hike as early as 2022. 

The meeting minutes revealed that policymakers were deeply divided over scaling back the aggressive bond-buying program. "Various participants" said they felt conditions for reducing the central bank's asset purchases would be "met somewhat earlier than they had anticipated," while others cautioned that the economy was in a precipitous position and that the pandemic continued to cause uncertainty. They cautioned a "patient" approach to any policy change, the minutes show.

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The minutes provided little insight about when to expect the Fed to start reducing its bond purchases, but Wall Street widely expects the Fed to provide more clarity into the timing of tapering when central bankers gather in August at their annual retreat in Jackson Hole, Wyoming.

"The Fed seemed to echo the notion that the economic picture is not as clear as perhaps the market thinks. But at the end of the day the minutes didn’t give us much new to chew on," said Mike Loewengart, managing director of investment strategy at E*Trade Financial. "They have already broadcasted a shorter runway to action than previously projected. So the bottom line is that the Fed will continue to watch the data and adjust accordingly."

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Fed Chairman Jerome Powell told reporters in June during a post-meeting press conference that officials had started "talking about talking about" weening the economy off of life support.

"I expect that we'll be able to say more about timing as we see more data, basically," he said. "There's not a lot more light I can shed on that." He said the Fed would give markets plenty of advance notice before it begins to withdraw the support that began last year to avoid a so-called market "taper tantrum" a la 2013.