FED MINUTES - WHAT TO WATCH ?

After months of mulling the move, the Federal Reserve finally tapered its bond-buying programme a week before Christmas.

The central bank’s staff in New York are now hoovering up $75bn of Treasuries and mortgage-backed bonds a month, down from the $85bn they’d been buying since the autumn of 2012.

The decision to taper adds extra interest to today’s release of the minutes of the December meeting of Fed’s policymakers. Investors will approach the minutes, which are due at 2pm New York time, with several questions and may even get some answers. Here’s a look at three of the questions.

Why did the Fed taper?

The most obvious – and also most likely – answer is because the US economy is showing further signs of improvement. Specifically, the unemployment rate has fallen to 7 per cent, rising house and equity prices have helped rehabilitate the finances of some US households and the drag from last year’s tax rises and sequestration should ease.

Investors, though, will also be interested in whether a stronger prompt for some officials is the concern that the cost of the bond-buying programme is outweighing its benefits. Anxiety the policy had begun to encourage reckless risk-taking was on the minds of some policymakers when the Fed first signalled its intention to taper last May.

How quickly will the Fed taper?

Those expecting the minutes to reveal detailed discussions about whether the Fed will reduce its purchases by $10bn, $15bn or any other number from now are likely to be disappointed.

Instead, investors will have to piece together an answer based on how optimistic a note the minutes strike about the outlook for the US. It is worth bearing in mind that the Fed has consistently erred on the side of caution, so the minutes will have to be particularly effusive about the outlook to persuade investors the central bank will taper at anything more than a measured pace.

Indeed, the minutes are likely to underline that the Fed is prepared to slow tapering should the data deteriorate significantly.

Is the Fed contemplating more changes to its forward guidance?

As the Fed begins to slow its bond-buying programme, it is relying ever more on so-called forward guidance to shape investors’ expectations about future policy.

In practice forward guidance amounts to verbal promises and the deployment of so-called thresholds.

The December meeting saw the Fed tweak the language around its unemployment threshold – the level the bank insists the rate needs to be at before it will consider raising interest rates. December’s statement said:

It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent.

The interest will be if the minutes reveal officials considered any other changes to its forward guidance, as the Fed seeks to convince investors that tapering will not quickly be followed a broader tightening in monetary policy.