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UOB Economic-Treasury Research

Company Reg No. 193500026Z


US FOMC Minutes: Fed Gives October Timeline For End Of QE,
Warns About Complacency On Risks
URL: www.uobgroup.com/research
Email: EcoTreasury.Research@uobgroup.com
Flash Notes
The June 2014 FOMC minutes did not contain any major surprise although there was extensive discussion about the
mechanics of rate normalization, which revealed that the Committee is starting to grapple with the technical issues of
how to reduce monetary accommodation in the future.
The minutes did explicitly spell out the timeline for the end of the Feds QE tapering as it would be appropriate to complete
asset purchases with a US$15 billion reduction in the pace of purchases in order to avoid having the small, remaining level
of purchases receive undue focus among investors. If the economy progresses about as the Committee expects, warranting
reductions in the pace of purchases at each upcoming meeting, this fnal reduction would occur following the October
meeting. This has been widely expected by the markets and UOB.
And within the discussions, most FOMC participants agreed that adjustments in the rate of interest on excess reserves
(IOER) should play a central role during the rate normalization process, and they viewed that setting the fxed rate
overnight reverse repurchase agreement (ON RRP) below the IOER rate could play a useful supporting role by helping to frm
the foor under money market interest rates.
The FOMC participants also discussed the appropriate time for making a change to the Committees policy of rolling
over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency MBS in
agency MBS. Many participants agreed that ending reinvestments at or after the time of liftof (of interest rates) would
be best, with most of these participants preferring to end them after liftof.
Some FOMC participants expressed concern that investors may be growing too complacent about the economic
outlook and the Fed should be on the lookout for excessive risk-taking. According to the minutes, low implied
volatility in equity, currency, and fxed-income markets as well as signs of increased risk-taking were viewed by some
participants as an indication that market participants were not factoring in sufcient uncertainty about the path of the
economy and monetary policy.
While ofering no new clues on the timeline of Feds increase rate hike cycle, the overall market perception of the
minutes was a dovish bias and soothed immediate concerns over a potential increase in interest rates, maintaining
an accommodative stance. That said, the minutes did suggest that there is a growing gap between ofcials who believe
US infation could remain too low for the Feds comfort and those who believe a spike in consumer prices could be
closer than forecasters think. According to the minutes, some policy makers expressed concern about the persistence
of below-trend infation, while a few participants even suggested the central bank might have to let unemployment fall
below its long-term normal rate in order to ensure infation moves back toward the 2% target. That sentiment was far
from unanimous, as some others expected a faster pickup in infation or saw upside risks to infation expectations because
they anticipated a more rapid decline in economic slack.
In line with the June minutes, we continue to factor a regular US$10bn reduction at each subsequent FOMC (July and
September) and a US$15bn cut as the last step, so we expect the QE to be fully terminated by the 28-29 October 2014
FOMC.
The recent good run of non-farm payrolls data would have been supportive of the call for an early 2015 frst FFTR hike
but the Feds downgrade of 2014 GDP growth and the continued dovish posturing in the June FOMC in addition to the
recent Fed guidance/comments are gravitating to a later date during 2015. We expect the Fed rate normalization to
Thursday, 10 July 2014
Alvin Liew Alvin.LiewTS@UOBgroup.com
Flash Notes
Thursday, 10 July 2014 Page 2
URL: www.uobgroup.com/research
Email: EcoTreasury.Research@uobgroup.com
Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group
makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein refect our opinion as of date of the analysis
and are subject to change without notice. UOB Group may have positions in, and may efect transactions in, currencies and fnancial products mentioned
herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its afliates, the reader should determine, the economic risks
and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these
risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise.
take place in 2Q-2015 (possibly starting in the 16-17 June 2015 FOMC) bringing the FFTR to 1.25% by end-2015,
and to 3.25% by end-2016 (down from 2% and 4% respectively).
Admittedly, the Feds monetary policy formulation is data-dependent and not expected to follow in a mechanical
fashion, so there remains signifcant risk to our projected timeline and trajectory for the FOMC rate normalization
cycle. The next immediate key event that could shape rate hike expectations will be the Fed Chair, Janet Yellens
semi-annual testimony to the US Senate Committee on Tuesday, 15 Jul 2014 and to the US House Committee
on Wednesday, 16 Jul 2014. This will be followed by the next meeting of the Federal Open Market Committee
to be held on 29-30 July 2014 which is without any updated Summary of Economic Projections or scheduled
press conference by Janet Yellen.
Please click on the following link to access the Minutes of 17-18 June 2014 FOMC:
http://www.federalreserve.gov/monetarypolicy/fles/fomcminutes20140618.pdf
The scheduled FOMC meetings in 2014 can be found on:
http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm#20363
Indicator As of 10 Jul 14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 1Q16F 2Q16F 3Q16F 4Q16F
US Fed Funds Target % 0-0.25 0-0.25 0-0.25 0.50 1.00 1.25 1.75 2.25 2.75 3.25
3M USD LIBOR % 0.23% 0.40 0.40 0.70 1.20 1.45 1.95 2.50 3.25 3.75
10y UST % 2.55% 3.00 3.00 3.25 3.50 4.00 4.25 4.50 5.00 5.25
Source: UOB Economic-Treasury Research Estimates

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