(Reuters) - Federal Reserve officials said it could start to slow bond purchases at one of its next few meetings if the economy improved enough to warrant it, according to minutes from its October meeting released on Wednesday.
* A few participants were inclined to set a quantitative floor on inflation, and others said the risks to the economic outlook had diminished by October.
* The Fed held an emergency conference call on October 16 to discuss contingency plans if the U.S. Treasury was unable to meet its obligations as a result of a government shutdown.
TODD SALAMONE, DIRECTOR OF RESEARCH AT SCHAEFFER’S INVESTMENT RESEARCH, CINCINNATI, OHIO:
“I really didn’t see anything in the minutes that would spark a huge sell off, and that’s realizing that the market did move lower.
“I made the comment right after the minutes came out, that you can have eight people looking at the minutes and have eight different interpretations. It’s what people are focusing on at that moment, and it takes a while for that to settle.
“I could point to a few factors that an equity buyer would not like, and I could point to something that an equity buyer would like.
“The biggest pro is that discussion about lowering interest rates on excess reserves. The whole point of that would be to facilitate bank lending, which would be further supportive of the economy...it would be interesting to see how that plays out.
“Another pro was the committee meeting to discuss contingencies, shows that they’re standing ready to act.
“If investors were looking for clarity for ‘when’, they didn’t get it.”
TOM NELSON, CHEF INVESTMENT OFFICER, REICH & TANG, NEW YORK:
“We are so far into quantitative easing and to suddenly come in with a different too. That would just confuse the market. I see the chances of this (cutting the interest on excess reserves) as remote. The impact of negative rates in Europe would be the same there as in the U.S. They are in a fundamentally different economic situation than the United States.”
RANDY FREDERICK, MANAGING DIRECTOR OF TRADING AND DERIVATIVES, SCHWAB CENTER FOR FINANCIAL RESEARCH, AUSTIN, TEXAS:
“I don’t see any huge surprise here but it seems like there are a lot of different opinions among the committee members, not just about the tapering but also about which threshold they might set and other stuff. It’s as if they are throwing everything on the wall to see what sticks. One could be asking how much credibility have they lost with the investing community.”
JACOB OUBINA, SENIOR U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
“They could have been a lot less constructive if they wanted to and this came before the strong payrolls report. Data since the meeting has been infinitely better and while policy will be data driven, their inclination at some point will be to taper in the not-too-distant future. It was a little more hawkish than anticipated; given the backdrop it was not as bad as it could have been.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON D.C.:
“They sounded a bit more hawkish than dovish as they were openly debating tapering in the near-term. Overall, it is constructive for the dollar as it highlights the divergence between the outlook of (the) European Central Bank and the Fed at this point of time.”
ERIC VILORIA, SENIOR CURRENCY STRATEGIST, FOREX.COM, NEW YORK:
“The dollar is gaining a bit after the minutes, even though the outlook for the economy was largely unchanged from September.
“It seems that they’re moving closer to tapering and it’s becoming more of a possibility in the coming months. But at the same time, they want to make sure that policy remains accommodative.”
BRIAN DAINGERFIELD, CURRENCY STRATEGIST, ROYAL BANK OF SCOTLAND, STAMFORD, CONNECTICUT
“The (forex) market is starting to perhaps pull forward the potential for tapering and might even put December back on the table. I think a lot will be riding on the November labor report.”
TODD SCHOENBERGER, MANAGING PARTNER AT LANDCOLT CAPITAL IN NEW YORK:
“This suggests we could have QE endlessly, but we want to hear something more at this point. The current rate of QE is giving us diminishing returns. Yes, the market has done well, but we’re still seeing job growth and GDP growth that are nothing special. Current QE is just getting us to first base.
“It’s possible that we could look at 16,000 as the level that marked the end of the bull market. Either the Fed does something more, or the White House announces a new economic growth program. There’s nothing else out there that’s getting traders pumped up.”
PAUL MANGUS, HEAD OF EQUITY RESEARCH AND STRATEGY AT WELLS FARGO PRIVATE BANK IN CHARLOTTE, NORTH CAROLINA:
“Nothing really surprising, the language was very similar. I was looking to see if there was any significant difference in the language. The minutes showed continued support for an accommodative stance, reinforced that they are likely to reduce bond purchases in the coming months, using similar language as before. Referred to the improvement in employment, although they also indicated it was uneven and they would hold rates near zero for an extended period of time to support the economy.
“Again, similar language to what we had seen previously. Market reaction so far has been mixed, it in many ways reinforces what we heard from some of the participants of the committee after they actually met in October, which were for the most part accommodative and data dependent.”
STEPHEN STANLEY, CHIEF ECONOMIST, PIERPONT SECURITIES, STAMFORD, CONNECTICUT:
“Seriously at some point they will taper. They are looking at strengthening their forward guidance and perhaps lowering the threshold on the unemployment rate. These things being discussed are live topics for the Committee. I’m not sure they will taper in December. If they want to taper in December, they would probably give us more guidance by now. The government shutdown was a more disruptive force in the short term than they had thought, but they figured it wasn’t going to break the economy in the long run.”
MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BNY MELLON, NEW YORK:
“We take these minutes as meaning March is the most likely scenario for tapering. There’s no overwhelming case to be made for them to act in December. We are surprised at the relatively little attention given to the impact of the government shutdown. Maybe it really was a non-event, judging by today’s retail sales data and the October nonfarm payrolls.”
STOCKS: U.S. stock indexes fell
BONDS: U.S. bond prices fell, boosting yields
FOREX: The dollar was modestly stronger against the euro
Americas Economics and Markets Desk; +1-646 223-6300