Wrightson ICAP: FOMC To Settle On General Taper Strategy This Week

The FOMC is likely to settle on a general tapering strategy at the July meeting, writes Wrightson ICAP. They believe the asset purchase program has "outlived [its] usefulness in every respect except one": meeting prior commitments, which is important as fwd guidance has become a front-line tool for mon pol.

• The press conference: "should solidify market expectations that the FOMC will be positioned to consider a tapering announcement at any point from the fourth quarter onward."
• Future action: More concrete taper guidance in September, pulling trigger "at some point shortly thereafter" (possibly November). The Fed will reserve the right to adjust the pace of tapering in response to economic developments, but in practice it's "highly likely" that it'll play out on a predictable schedule (i.e. autopilot).
• Wrightson ICAP "suspects" the Fed may choose to wind down MBS buys faster than Tsys ("initial reductions of $10 billion in each of the two asset classes would eliminate MBS purchases within four meetings while leaving some residual Treasury purchases to linger at the end of the process".
• Fed to avoid any new commitments about delaying rate liftoff until after taper is concluded; likely to reiterate that reinvestment likely to continue to a period of time after tapering. May ultimately decide to reinvest MBS principal in Tsys but "it doesn't need to make that call this month".