US Fed: 'tapering cometh'

Minutes of the October meeting of the US equivalent to the Monetary Policy Committee suggest it will reduce bond-buying sooner, rather than later.

by Emma Haslett

Earth-shaking news from across the pond: minutes of the October meeting of the Federal Open Market Committee, the US equivalent of the Bank of England’s Monetary Policy Committee, suggest ‘tapering’ – reducing its $85bn (£53bn) bond-buying programme – is nigh. In fact, it could start as soon as next month.

Remember what happened when Fed chairman Ben Bernanke vaguely hinted in May that the US was kind of, sort of, maybe thinking about considering putting an end to QE? All Bernanke had to say was a noncommittal ‘in the next few meetings we could take a step down in our pace of purchases’, and markets in emerging economies tumbled as investors began a mad dash to put their money back into the US. After that we waited - and waited - and waited. But Bernanke hasn’t said anything on the subject since.

The minutes of the October meeting are similarly vague. ‘[It is] generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months’, it said.

Given the reaction Bernanke’s original statement provoked, the Fed must be pretty confident this time that something is going to happen soon. Brian Daingerfield, a US-based currency strategist at RBS, told Reuters it could begin as soon as next month. ‘The market is starting to pull forward the potential for tapering and might even put December back on the table,’ he said. ‘A lot will be riding on the November labour report.’

The committee also assured investors that short-term interest rates will stay low, even if tapering begins. That’s in response to the fact that borrowing rates – mortgage rates in particular – spiked over the summer as lenders took Bernanke’s comments to mean interest rates will begin to rise shortly.

The revelation came a day after minutes were of the Bank of England’s Monetary Policy Committee’s November meeting, which hinted that it may make changes to its forward guidance to ensure interest rates stay low for the time being. Will a US move to start tapering herald a similar move in the UK? Unlikely at the moment – the emphasis on this side of the Atlantic seems to be on ensuring strong, sustained growth.

The other interesting point the Fed minutes made was that the committee had an ‘unscheduled’ conference call on October 16, as the US economy teetered on the brink of doom. Apparently, the esteemed members of the committee all agreed had Congress not reached an agreement on its debt ceiling, the consequences would have been ‘potentially catastrophic’. Which is a bit like saying the Co-op Bank is having ‘quite a bad week’.

December is Bernanke’s final committee meeting before he hands the reins of the Fed to his successor, Janet Yellen. If he can get the ball rolling on tapering, it would wrap up his tenure nicely. Bring on that labour market data…

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