Ho, ho, ho, whaddaya know! As it turns out, the Fed is actually starting to think about withdrawing some of its stimulus measures soon.
The minutes of the most recent FOMC meeting revealed that some interest rate-setting committee members aren’t exactly seeing eye-to-eye on the benefits of quantitative easing. There are those that said that the central bank should be ready to vary the pace of its monthly $85 billion bond purchases should the downsides of QE surface, or as the economic outlook changes.
In short, this means that Fed officials could end quantitative easing program way before they reach their 6.5% unemployment target.
Why the sudden change of rhetoric, you ask? For one, policymakers are well aware that they would have to end their asset purchases sooner or later. They are worried of the sudden pickup in volatility and spike in interest rates that could arise when QE comes to an end. And so, they have decided to gradually ease the flow of assets back into the economy to avoid any shocks.
The Fed also seems more confident about the state of the economy now that the U.S. could handle a slowdown in asset purchases. In particular, policymakers seem to be pretty happy with the recent developments in the labor market. The minutes revealed that policymakers see that employment has gotten a “substantial” improvement.
Of course, nothing is set in stone yet as policymakers are still divided with their opinions. Some are warning against a premature withdrawal of stimulus as this could derail the U.S. from the ongoing economic rebound. After all, even though we saw some significant improvements in the labor market, the unemployment rate still remains at 7.9% – one of the highest levels among the major economies.
Some Fed officials also insisted that the public should be reminded that achieving the target rates for inflation and employment wouldn’t automatically translate to an increase in the Federal funds rate. However, the markets still reacted strongly to the news as the Fed might be considering a shorter timeline for their aggressive easing moves.
What was probably most surprising about the FOMC minutes was that the policymakers were willing to overlook the unemployment rate target of 6.5%. This was in stark contrast to their December rhetoric where the FOMC said that “growth in economic activity paused in recent months” and that the expansion will proceed at a moderate pace.
Given the current market environment where fundamentals are dictating price action instead of risk sentiment, this sudden turnaround in interest rate expectations from the Fed could provide support for the Greenback in the coming weeks. Do you agree? Let us know what you think by voting through the poll below!