Fed minutes give little sign of when stimulus will end

Minutes from the U.S. Federal Reserve's July policy meeting released Wednesday provided no clear signal of when the central bank will start scaling back its $85 billion US bond-buying program.

Markets end the day lower after viewing minutes from July policy meeting

Markets were subdued Wednesday in anticipation of the release of minutes from the Federal Reserve's latest policy meeting, which could signal when the central bank will start reducing its monetary stimulus. (Brendan McDermid/Reuters)

Minutes from the U.S. Federal Reserve's July policy meeting released Wednesday provided no clear signal of when the central bank will start scaling back its $85 billion US bond-buying program.

Traders had been waiting on the minutes of the July 30-31 meeting of the Federal Open Market Committee in the hope they would reveal whether Fed officials think the economy is strong enough to warrant an interest-rate rise soon and give a more precise timeline for the phasing out of the Fed's economic stimulus program.

Dollar drops

The Canadian dollar closed sharply lower Wednesday as the U.S. dollar gained ground on the strength of the Fed's minutes.

The loonie finished down 0.78 of a cent at 95.48 cents US.

The Fed has been financing government debt and mortgages for several years by buying $45 billion in U.S. treasury bonds and $40 billion in mortgage-backed securities each month.

But Fed chairman Ben Bernanke signalled in June that the central bank would moderate its buying later this year if the economy continues to recover, with the aim of concluding the purchase program by the middle of 2014.

The minutes of the meeting, released after a customary three-week lag, showed a split opinion on whether the Fed should stick to that timeline.

Only one member of the committee voted against continuing to buy U.S. bonds to keep rates low, but several members thought the Fed should pull back sooner on its monetary policy than it indicated in its June report.

"Participants were satisfied that investors had come to understand the data-dependent nature of the committee's thinking about asset purchases," the Fed said in its minutes, meaning that what it does will depend on economic data in the coming months. 

No jobs, trade targets

The committee members decided not to set any firm targets for employment or trade numbers, as those might be easily misinterpreted by the markets.

CIBC analyst Peter Buchanan said the divisions of opinion in the minutes highlight the uncertainty still ahead.

"That lends some support to our own view that while chances of an early move have increased, action at the next meeting is not a done deal," Buchanan said in a statement. "Either a poor August job report or Congressional impasse on government funding could lead the Fed to start scaling back asset purchases later."

For the traders, it’s all about the timing of the Fed's scaleback, according to Diane Swonk, chief economist at Mesirow Financial.

"It’s always difficult to time things on the Fed and the Fed is trying to time on the economy and the economy hasn’t been doing anything on time in the U.S.of late – we’re still seeing the U.S. economy struggle I think a little more than the Fed had hoped it would over the summer," she told CBC News.

Many people do expecting tapering in September because vehicle sales are up and unemployment down, she added.

The release of the minutes initially rattled Wall Street as investors digested members' thoughts on the bond purchases, the short-term rate policy and the Fed's characterization of the economy.

The Dow ended the day down 105 points, or 0.7 per cent, to 14,897. It was the sixth straight day of losses, the longest downward run since July 2012.

The Standard & Poor's 500 index fell nine points, or 0.6 per cent, to 1,642. The Nasdaq composite fell 13 points, or 0.4 per cent, to 3,599.

Bond yields increased, though. The yield on the 10-year Treasury note rose to 2.86 per cent from 2.81 just before the minutes were released.

In Toronto, the S&P/TSX composite index was down 97 points to 12,573..

Markets were generally subdued Wednesday ahead of the publication of the minutes.

Several retailers, including Staples and American Eagle, issued disappointing profit forecasts, leading to a drop in morning trading.

Stock prices continued their slide after the minutes were released as traders realized the Fed is still on track to slow its bond purchases by the end of the year.

Forecast-busting U.S. housing figures on Wednesday — showing sales of previously occupied U.S. homes surged 6.5 per cent in July — reinforced speculation that the so-called tapering could begin within a month. That's contributed to a recent spike in market interest rates.

"This should make Fed policymakers more comfortable with a September tapering," said Sal Guatieri, senior economist at BMO Capital Markets.

He noted that some prospective home buyers may have rushed their purchases to pre-empt a further increase in borrowing rates.

 "A few more months of data are likely needed to wave the all clear flag," he said.

The Fed is considered most likely to slow its bond buying after its September or December policy meeting because after each one, Chairman Ben Bernanke will hold a news conference and could explain such a major step.

The Fed holds eight policy meetings a year; four include news conferences by the chairman. Besides September and December, the Fed will also meet in October before the year ends

Global markets shaky

In Europe, Germany's DAX rose 0.1 per cent to 8,305 while the CAC-40 in France rose the same rate to 4,031. The FTSE 100 index of leading British shares was down 0.4 per cent at 6,425, underperforming its peers because HSBC PLC has gone ex-dividend.

Global markets have been shaky this week as traders worried about a pullback in the Fed's bond purchases. The Dow, for example, had posted a five-day sequence of losses for the first time this year in the lead-up to Wednesday's release of the Fed minutes while U.S. bond yields had risen to their highest levels since 2011.

Money has also flowed out of emerging stock markets, denting the currencies and stock markets of countries such as Malaysia, Indonesia and India.


With files from The Associated Press, Reuters