Fed Minutes: Tapering could begin mid-November or mid-December

Yahoo Finance’s Brian Cheung breaks down the biggest take aways from the latest Fed minutes.

Video transcript

ALEXIS CHRISTOFOROUS: Just about a moment ago, the Federal Reserve released the minutes from its most recent meeting. Our Fed correspondent Brian Cheung has been looking them over. He joins us now. What are the big takeaways there, Brian?

BRIAN CHEUNG: Well, the big takeaway, Alexis, is that the plans to taper asset purchases, again, referring to the Fed's pace of $120 billion a month of purchases per month, really kind of appears to be fleshed out. This is according to the minutes detailing the deliberations that were done in that September 21st and 22nd meeting. So, again, this is backwards looking, so any sort of inflation data, employment data that we've gotten since then does not seem to reflect or would not reflect any sort of commentary that we got here.

But the details of the FOMC noting that, quote, "Participants noted that if a decision to begin tapering purchases occurred at the next meeting--" and again, the next meeting is going to be November 2nd and 3rd-- "--the process of tapering could commence with the monthly purchase calendars, beginning in either mid-November or mid-December." So the Fed kind of illustrating in these minutes that whenever they do announce that taper, the actual process of slowing its purchases will begin pretty shortly thereafter in a matter of weeks, perhaps.

And we're also getting a little bit more detail on how the Fed might do that. It appears to be the case that the preferred path is a $10 billion a month reduction for US treasuries, $5 billion a month reduction for mortgage-backed securities. But interestingly, they want to leave the option on the table to, quote, adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected. And several of the FOMC members said they would prefer to move faster on slowing its asset purchases.

And again, one more reminder to kind of draw the distinction here between slowing its purchases and then reducing its overall purchases. What it's describing here in that $10 billion, $5 billion pace is slowing the current purchases that they have. So, ultimately, the balance sheet will still be increasing in size, but rather, the pace by which it's increasing will slow when they do ultimately commence. That hasn't happened yet, but again, all signs pointing to the Federal Reserve announcing something as soon as that November meeting.

On inflation expectations, interestingly, the Federal Reserve at the time appeared to say that the broad measures that they looked at didn't appear to point to anything outside of range. Again, that's before that hot CPI print that we got this morning. So we'll see if Fed officials change their tone on that, as they head into the next meeting.

But it seems like, for all intents and purposes, Alexis, all for a green light in that November meeting, barring any sort of other type of change there. But again, Federal Reserve offering a little bit more detail on how they might taper in these FOMC minutes from September. Not sure we can hear you, Alexis.

ALEXIS CHRISTOFOROUS: Hey, Brian. Here, I'm back with you. Sorry. I'm just looking at the markets and checking to see if there's any kind of a reaction here to those minutes. Doesn't seem to be. And even taking a look at the bond market, we've got the yield on the 10-year now at 1.55%. Are you surprised that the market's not reacting at all here to what they're hearing coming out of these Fed minutes?

BRIAN CHEUNG: Not necessarily. I think, again, the idea here was for the Federal Reserve to clearly communicate to the markets exactly what they were doing. And actually, if you look at the text of what the minutes say, they describe this as an illustrative path. And the reason why is because they wanted to signal to markets with plenty of lead time exactly how they would do that.

They said they wanted it to be simple to communicate and entail a gradual reduction in the pace of net asset purchases. So the Fed doing exactly what it's been doing, essentially tiering the markets out with the talk of tapering, the talking of talking about tapering, just to get the point really home that this is exactly how we're going to do it. This is when we're going to do it, so that markets don't spiral out of control.

And then just one separate thing I wanted to mention here that's off topic, but is relevant-- no notes in these meeting minutes with regards to the ethics issue that the Federal Reserve was facing that has engulfed at least three senior Fed officials.

But at the very bottom of the minutes, notable that says, quote, "This deliberate and thoughtful review--" referring to the review of its ethics rules that Fed Chair Jerome Powell launched shortly after the episode, quote, "--will focus on strengthening Federal Reserve rules and standards in ways that will help guard against even the appearance of conflicts of interest or any other improprieties." So, worth watching as the Federal Reserve tries to embark on a review to make sure they clean up that PR mess that they've had with those big trades made by those three Fed officials.

ALEXIS CHRISTOFOROUS: All right, thanks a lot for breaking down those Fed minutes for us, Brian Cheung.