Stocks slide, U.S. dollar gains after release of Fed minutes

NEW YORK (Aug 22)   Global equity markets and bond prices slid while the U.S. dollar strengthened on Wednesday after minutes from the latest Federal Reserve policy-setting meeting did not alter expectations the Fed would eventually begin to trim its bond-buying program.

U.S. equities dropped to session lows, rebounded to trade in positive territory, and fell again after the afternoon release of minutes from the Fed’s policy-setting meeting in late July.

The minutes showed differences among members of the Federal Open Market Committee as to when the Fed should start winding down its stimulus but did not materially change the market’s expectation of a September tapering.

“If investors were looking for strong, clear signals from this month’s FOMC minutes, they were disappointed,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh.

Yields on the benchmark 10-year U.S. Treasury note soared to almost 2.9 percent, a level last seen in July 2011.

The Dow Jones industrial average closed down 105.44 points, or 0.70 per cent, at 14,897.55. The Standard & Poor’s 500 Index fell 9.55 points, or 0.58 per cent, at 1,642.80. The Nasdaq Composite Index fell 13.80 points, or 0.38 per cent, at 3,599.79.

MSCI’s all-country stock index was down 0.85 per cent at 367.09, while the pan-European FTSEurofirst 300 index of top regional shares closed down 0.6 per cent at 1,207.71.

Minutes of the U.S. central bank’s July 30-31 meeting, released on Wednesday, showed that almost all of the 12 members of the policy-making Federal Open Market Committee agreed a change to the stimulus was not yet appropriate.

A few Federal Reserve officials thought it would soon be time to slow the pace of their bond buying “somewhat” but others counselled patience, according to meeting minutes that offered little hint on when the U.S. central bank might reduce its purchases.

At the same time, the Fed is considering a new tool – known as a reverse repo program – to help it drain cash from the banking system when it does begin tapering.

Investors are anxiously predicting when the Fed will start to slow its $85-billion (U.S.) in monthly asset purchases, with most predicting September as the beginning of the end of the quantitative easing program, known as QE3.

The minutes provided few clues on the potential timing for a reduction but did little to dissuade people expecting a policy change next month.

“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,” the minutes said.

“At the same time, a few others pointed to the contingent plan that had been articulated on behalf of the committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan.”

After June’s policy meeting, Fed Chairman Ben Bernanke told a news conference the central bank expected to start reducing its bond purchases later this year, with an eye toward halting them altogether by mid-2014.

U.S. stocks fell to session lows after the minutes were released while long-dated U.S. government bond yields rose. The dollar gained against the yen and euro.

The Fed, which has taken unprecedented steps to help the slow U.S. economic recovery, wants to see sustainable economic growth and improvement in the labour market before it winds down the bond buying.

According to the minutes, policy makers noted that the U.S. unemployment rate – which stood at 7.4 per cent last month – had declined “considerably” since the latest round of bond buying was launched in September, though there was disagreement on the cumulative improvement given, for example, the high number of Americans who had given up the hunt for work.

The Fed cut overnight interest rates to near zero in 2008 and has more than tripled its balance sheet to around $3.6-trillion through a series of bond purchases.

Policy makers have pledged to keep rates near zero at least until the unemployment rate falls to 6.5 per cent, provided inflation remains under control.

The minutes showed that several policy makers were willing to consider lowering that threshold if they determined that an even easier policy stance was needed. Still, a few worried changing the threshold could cause it to be viewed as a moveable goalpost, which could undermine its effectiveness.

In the end, the Fed made no formal policy change at last month’s meeting, saying in a statement on July 31 that the U.S. economy continues to need support.

The Fed is also considering a new tool to help it drain cash from the banking system and keep short-term interest rates at their targeted level when it decides to shift away from its current ultra-loose monetary policy, the minutes showed.

Fed policy makers during their July 30-31 meeting were briefed on the potential for creating a fixed-rate facility for overnight reverse repurchase agreements or reverse repos.

This reverse repo program, if adopted, will complement payment of interest on excess reserves and other tools to help achieve the Fed’s interest rate targets, according the Fed’s minutes released on Wednesday.

“In general, meeting participants indicated that they thought such a facility could prove helpful,” the minutes said.

While they expressed interest in such as program, there was no timing indicated when policy-makers might decide on such a reverse repo facility.

In an overnight reverse repo transaction, the Fed would sell a Treasury bond to a U.S. primary dealer or a large money market fund and then would buy it back the next day. The transaction temporarily takes cash out of the banking system, while the dealer or fund earns interest on the reverse repo.