Could Fed's QE-3 tapering come as soon as September?

Zhang Yuwei|New York Journal

The release of the minutes of the Federal Reserve's late July meeting on Wednesday showed that policymakers came closer to scaling back the $85 billion-a-month program in government bonds and mortgage-backed securities - the so-called Quantitative Easing round 3 - which was launched to hold down long-term interest rates and boost the economy.

The official summary, however, showed that the 12 members of the Federal Open Market Committee (FOMC) offered no hints on timing for the tapering. From the Fed's previous signals, September and December are considered as the most likely months when it will take place.

"A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases," according to the minutes.

US stocks fell after the minutes were released while long-dated US government bond yields rose, with the dollar gaining against the yen and euro.

"The minutes have not shed much light on when the Fed will start to taper, though the market appears to be pricing in a September start, and the Treasury yield is just under a two-year high," said Joseph Lake, an economist with the Economist Intelligence Unit in New York.

Lake said that the decision to taper will be guided by economic data, which could still change the narrative between now and the next FOMC meeting in September.

Sophii Weng, an economist with Standard Chartered Bank in New York, said the minutes support the British Bank's view that the Fed will "reduce bond-buying in the September meeting".

Weng said the reason being that "there seems to be a consensus building behind Bernanke's tapering timeline within the FOMC".

"The FOMC still awaits more signs (data) of a pick-up in growth," said Weng.

Regarding demand, FOMC members do not seem worried about higher mortgage rates, said Weng.

The minutes also showed that the Fed is discussing a possible reduction in the unemployment threshold - currently at 6.5 percent - for an increase in interest rates.

"The minutes show 'support' for the current thresholds for forward guidance for the federal funds target rate, although some members still see potential modification as a possibility if additional accommodation is needed," Weng added.

One thing concerning an improved economy to look at is the job numbers. The July - or the latest - unemployment rate was at 7.4 percent, 0.2 point down from June and 0.5 down from January, which was considered as "declined", with jobless claims in early August falling to their lowest level in almost six years.

"In considering the likely path for the Committee's asset purchases, members discussed the degree of improvement in the labor market outlook since the purchase program began last fall," said the minutes. "The unemployment rate had declined considerably since then, and recent gains in payroll employment had been solid."

"Economic data in recent months have been largely positive; trade, manufacturing and housing have all been strong," said Lake.

"If steady economic progress is maintained, there is a good chance that the Fed could announce a reduction in its asset purchases at its September meeting," said Lake. "This depends, however, on continued economic momentum. The Fed could maintain or even increase asset purchases if the recovery is threatened."

The signal of tapering was first brought up by the Fed's chairman Ben Bernanke in June when he indicated the stimulus program could be scaled back later this year with the aim of halting them by mid 2014, if the economy continues to improve.

"If economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly," Bernanke said in July before the House Financial Services Committee.

But the Fed's chief message left investors - at home and abroad - speculating and even worried immediately after the message.

Chinese shares responded with a strong slump as the Shanghai Composite Index dropped in one day to its lowest point in nearly seven months after Bernanke's remarks about exiting the QE3 back in June.

"What the market will likely take away from these minutes is that Bernanke's thresholds given in June - QE ending when the unemployment rate reaches 7 percent, expected by mid-2014 - were actually broadly supported," said Weng.