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Fed Minutes Show Tapering Support but Split Over Timing Amid Delta Spread

'Most participants anticipated that the economy would continue to make progress towards (labor market and price stability goals), which could be reached this year,' Fed minutes indicate.

The Federal Reserve could begin rolling back some of its extraordinary stimulus in the coming months, according to minutes of its July policy meeting, but no firm date or process was agreed amid a debate over the strength of the recovery and the pace of inflation.

Minutes of the July 27 to July 28 policy meeting, however, emphasized that central bankers did not want to signal a change in the Fed Funds rate by simply discussing, or even planning for, a change in the pace of its $120 billion in monthly bond purchases. 

In fact, a majority of participants in the meeting noted that the current increase in Delta variant infections could restrain growth in the labor market and delay the full re-opening of the world's biggest economy. In that spirt, the minutes suggest, the benchmark of 'substantial progress' in both the jobs market and inflation targets had yet to be reached .

"Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally in order to end both sets of purchases at the same time," the minutes indicated. 

"Many participants noted that, when a reduction in the pace of asset purchases became appropriate, it would be important that the Committee clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate," the minutes indicated. "A few participants suggested that the Committee would need to be mindful of the risk that a tapering announcement that was perceived to be premature could bring into question the Committee's commitment to its new monetary policy framework."

U.S. stocks were extended declines in the immediate moments following the release of the minutes, with the Dow Jones Industrial Average marked 140 points lower on the session and the S&P 500 dipping 15 points in early afternoon trading.

Benchmark 10-year Treasury bond yields, meanwhile, edged modestly higher, to  1.278%, while 2-year notes were marked at 0.224%.

"It’s clear from the minutes that the Fed isn’t ready to start tapering yet, but they are leaning towards making an announcement by the end of the year at the latest," said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance. 

"In the short run, the market is going to remain focused on growth and delta variant concerns, but as we move past those challenges, the good news about the economy and job market should give investors a renewed boost of confidence and that is what will drive the market to new highs before the end of the year," he added.

The July minutes, while neutral in tone, preceded a series of weaker-than-expected data showing a slowdown in the housing market, a sharp decline in July retail sales and the weakest reading of consumer sentiment in more than a decade.

Inflation, however, is running at its hottest rate in more than 13 years, at 5.4%, and stocks have printed a series of all-time highs following the fastest rebound from last year's pandemic peak trough in U.S. history and more than 940,000 jobs were added to the economy last month. 

At the same time, Delta-variant infections are rising at around 114,000 per day, and the Atlanta Fed's GDPNow forecasting tool is suggesting a current quarter growth rate of 6.1%.