Earlier today the NY Fed published their July Survey Response of Primary Dealers. While this contains a plethora of information, we believe the most pertinent response was with respect to the their expectations for the monthly pace of asset purchases over the next year. In the table below we compiled their ‘median’ view after each of the FOMC meetings scheduled through July 2014 and sure enough they too believe that the Fed will begin to scale back QE at the September meeting, affirming our 3Q outlook.
Furthermore, this helps to address some of the other variables we highlighted other than ‘when to taper’:
- What to taper – Treasuries, MBS or a combination of the two?
- How to taper – According to a schedule, by assessing economic data or via numerical threshold criteria?
- Pace of tapering – Reduce by a smaller, but consistent, amount per meeting ($10-15B) or a larger amount ($35-50B) followed by a pause?
- Asset duration – Curb longer-dated assets first or equally weighed throughout the curve?
From this survey it appears that QE tapering could come in the form of a combination of Treasuries & MBS. Initially, the FOMC may prefer to reduce Treasury purchases at a faster pace than MBS’s in efforts to provide support to the US housing market. In terms of ‘how to taper’ the FOMC has been rather consistent with the mantra of ‘assessing the economic data’, although if we look at the table above this seems very similar to a preset ‘schedule’ whereby they see the ‘pace of tapering’ at a smaller $10-15B, but somewhat consistent amount. This timeline sees QE3 come to an end by June 2014.
With June 2014 now in mind, the market may have a more concrete view about the timing of the first Fed rate hike, which is when the Fed will begin to “apply the brakes”. In order to do this we will analyze the 30-day Fed Fund futures curve. Two days ago, pre-July FOMC meeting minutes, the market was priced to see the first rate hike (to 0.50%) around April 2015, however as of today (post-NY Fed survey results) the curve has not only steepened, but has also shifted materially to the left. Accordingly, the market now believes the timing of the first Fed rate hike could be February 2015.
Chart Source: Bloomberg, FOREX.com