The release of the July Federal Open Market Committee meeting minutes today and the Jackson Hole Economic Policy Symposium starting tomorrow are likely to dominate near-term activity in financial markets. Despite mixed economic data, it appears increasingly likely that some form of tapering will be announced at the FOMC’s September meeting.
Global CIO Commentary by Scott Minerd, Guggenheim Partners, LLC
Market participants remain more focused on the possibility of a reduction in the Fed’s asset purchases than on economic data. Recent comments by Federal Reserve presidents, including the particularly dovish Charles Evans of the Chicago Fed, suggest the U.S. Federal Reserve is likely to announce a tapering of quantitative easing after the Federal Open Market Committee’s September 17-18 meeting. Wednesday’s release of the July FOMC meeting minutes and the Fed’s Jackson Hole Economic Policy Symposium, which begins on Thursday, will provide investors clues about the central bank’s upcoming moves. Importantly, there is a growing consensus that some form of tapering is on the way.
Recent economic data is decidedly mixed, and not enough to justify rapid tapering in our opinion. However, since June the Fed has made the markets take their medicine and we see a strengthening in commitment by the Fed to hold to its guidance on the path of the program. Now the internal debate is likely no longer “when” but “how much?” The size of the proposed monthly decrease was originally thought to be $20 billion, but economic headwinds, particularly from the housing sector, make us think that the Fed may settle on a monthly reduction of around half that amount (evenly split between Treasuries and mortgage securities).
Regardless of the amount of tapering and its composition, the bottom line for investors is that financial markets will probably be dominated in the coming month by a great deal more of tapering-related noise. This would be a negative for risk asset prices, and is likely to continue to drown out a number of other fundamental economic and policy-related issues including the full impact of the sequester and Washington’s looming budget and debt ceiling debates.
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