Minutes from the July Federal Reserve meeting reveal that tapering is approaching. The minutes released on Wednesday show that most of the members are inclined to reduce the purchase of assets by the end of the year. This process is also known as tapering.
Although no decision has been made, the news weighed on Wall Street, which closed in sharp decline. Both the S&P 500 and the Dow Jones slid after the minutes were released. Reportedly, the markets were still in decline on Thursday morning after the bell rang. The S&P 500 was down 0.63%, while Dow Jones and Nasdaq both opened down by 0.66%.
The Fed currently buys $120 billion worth of government and other bonds every month to stimulate the US economy. The Fed agreed to continue buying bonds until the economy reaches full employment and inflation rates stay at 2% after the two-day meeting.
“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes stated.
The committee agreed that the employment rate has not improved enough for them to consider raising rates. The Fed has repeatedly insisted that the tapering will come first and that interest rate hikes will most likely follow when the tapering process is complete.
The Fed is scheduled to have another policy meeting towards the end of September.
The minutes generally painted an optimistic outlook on the state of the economy.
Last month’s core CPI came in well below the predictions, indicating that core inflation only rose 0.3%. This is a significant decrease from June’s 0.9%. Core inflation metrics are often considered a more reliable indicator since they exclude petroleum and food, which are quite volatile.
And while consumer prices jumped 5.4%, many dismiss the event as a natural reaction to economies reopening. The CPI and other price measures have all been on the rise since the beginning of the year. However, pent-up demand for restaurants, travel, retail, and more have bolstered consumer spending. For three months leading up to June 30, consumer spending had climbed 11.8% – the second-fastest rate since 1952.
The Fed minutes along with July’s CPI could potentially indicate that the Fed had been right all along. Although inflation has undoubtedly risen since the beginning of the year, it looks like it really might be ‘transitory’. Consumer prices have risen parallelly with the pent-up demand. But will they continue to increase even when there is no pandemic to act as a catalyst?
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