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Fed Minutes Show Tapering Patience, Debate Over How To Best Execute

Fed officials "generally agreed that the economic recovery was incomplete and that risks to the economic outlook remained," according to minutes of the central bank's June meeting.

The Federal Reserve remains unlikely to alter the pace of its monthly bond purchase, minutes from the central bank's last meeting, which ended on June 16, indicated Wednesday, as Chairman Jerome Powell and his colleagues repeated their view that the benchmark of "substantial further progress" on job growth and inflation has not yet been reached. 

Minutes from the Fed's June meeting showed that members of the Open Markets Committee noted that downside risks to the domestic economy remained, and that the post-pandemic recovery was deemed 'incomplete'. 

When the slowing of the $120 billion in monthly bond purchases does happen, however, FOMC officials debated as to whether mortgage backed securities should be slowed first, or sold in unison with Treasury bonds, with officials noting the need t0 be "well positioned" to execute any tapering in response to "unexpected economic developments" which the Fed said would include faster-than anticipated progress towards its inflation and labor market goals.

"Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data," the minutes read. "Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation."

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Benchmark 10-year Treasury note yields, which traded below the 1.3% mark for the first time since early February prior to the minutes release, were marked at 1.313% in the immediate moments after the accounts were published.  

The moves have extended a rally in Treasury bond prices, which move in reverse of yields, comes amid a paring growth expectations in major economies around the world and the worrying increase in Delta-variant coronavirus infections in Europe and Asia.

ISM data published Tuesday indicated a notable slowdown in services sector activity -- a key driver of U.S. economic growth -- while the Atlanta Fed's GDPNow forecasting tool is indicating a third quarter advance of around 7.8%, down from 8.6% at the start of the month.

Yesterday's 5% 'top-to-bottom' slide in oil prices, predicated on both the surge in Delta-variant cases in Asia and the chaos linked to the collapse of OPEC discussions on output curbs, also accelerated the Treasury market rally.

Inflation concerns, which gripped markets for most of the spring, have faded somewhat, as well, amid a peak in non-oil commodity prices and the slowing impact of fiscal support from the $1.9 trillion American Rescue Act.