The US dollar is narrowly mixed against the major currencies after being confined to tight ranges through the Asian, and European morning session. Equities are nursing small losses, and interest rates are pushing higher. The yield on the 10-year German Bund reached 50 bp for the first time since early 2016. Oil prices have steadied after yesterday’s slide. 

The FOMC minutes from last month’s meeting failed to shed fresh light onto the timing of the beginning of gradually reducing its balance sheet. However, it seems as if an agreement on it could be achieved before the next move on the Fed funds target. That said, the minutes were explicit: “most” thought that the recent softening of prices was due to “idiosyncratic” developments.  

In terms of Fed policy, the market’s attention now turns to Yellen’s semi-annual testimony to Congress next week, followed by the July 25-26 FOMC meeting. The Fed has yet to adopt the tactics under the otherwise plain-spoken Chair that would maximize the degrees of freedom in terms of meetings. Specifically, the Fed seems only comfortable to announce policy changes at meetings followed by press conferences. It could hold press conferences after every meeting, which is what the Bank of Japan and the European Central Bank do, for example.  

Although the minutes do not clarify the situation, we expect the Fed to be content monitoring the economy until the September FOMC meeting. It will have a better sense of the trajectory of prices, including wages. It can have a better sense of the true signal being generated by the broader financial conditions.  

We expect the economy to evolve to allow the Fed, which has put the market on notice that it will “relatively soon” begin not reinvesting all the maturing Treasuries and MBS, to carry through with this commitment at the September FOMC meeting. This will allow the balance sheet to shrink by what seems like an inconsequential $30 bln before the end of the year.