Federal Reserve preparing for taper this year, July minutes show

Minutes from the July Federal Reserve meeting, released Wednesday, indicate a willingness to start reducing asset purchases before the end of the year.
Officials stressed that there is no link between tapering and potential interest rate hikes.
Some members expressed concern over inflation, though opinions varied widely.

Federal Reserve officials at their July gathering made plans to pull back the pace of their monthly bond purchases likely before the end of the year, meeting minutes released Wednesday indicated.

However, the summary of the July 27-28 Federal Open Market Committee gathering indicated that the central bankers wanted to be clear that the reduction, or tapering, of assets was not a precursor to an imminent rate hike. The minutes noted that "some" members preferred to wait until early in 2022 to start tapering.

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The post-meeting statement painted a generally upbeat look on the economy, but the minutes noted some misgivings.

Officials judged that "uncertainty was quite high" about the outlook, with the Covid-19 delta variant posing one challenge and inflation another. Some members noted "upside risks to inflation," in particular that conditions Fed officials have labeled as transitory might last longer than anticipated.

Those worried about inflation said tapering should start "relatively soon in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated."

However, the minutes noted substantial differences of opinion, with some members even worried that inflation could go back into a downward drift if Covid cases keep rising and potentially dampening economic growth.

While the market is expecting tapering soon, it still doesn't see interest rate hikes coming at least for another year or so. Futures contracts tied to the fed's benchmark interest rate are pricing in about a 50% chance of a rate hike in November 2022 and a 69% chance of an increase the next month.

There also was talk about "elevated valuations" across asset classes, with some members worrying that easy Fed policy was raising prices and threatening financial stability.

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