No Tapering Suggested by June FOMC Minutes

on Jul 8, 2021
Updated: Dec 19, 2022

The much-awaited June FOMC Minutes released yesterday did not hint at any tapering. The Fed managed to downplay the hawkish message sent three weeks ago, however the US dollar liquidity is shrinking.

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The Federal Reserve of the United States (Fed) has released the minutes of its last meeting that took place three weeks ago. The event was much-awaited by the investing community because some voices called for the Fed to signal the tapering of its asset purchases.

It did not.

Instead, the Fed insisted that there is a need for the accommodative measures to remain in place. More precisely, the US Treasuries bond-buying remains unchanged for the time being, at $80 billion/month, as does the Mortgage Backed Securities (MBS) buying, at $40 billion/month.

The Fed signaled more discussions are to be held on MBS tapering, and that is likely to be the starting place for any tapering of the asset purchases. In other words, a mixed message that did not move the markets.

Indeed, the EUR/USD pair barely moved on the news. While the Fed’s message from the minutes was dovish regarding the dollar, investors are not forgetting that the actual US dollar liquidity in the system is shrinking.

Shrinking US Dollar Liquidity Suggests Further Strength

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Perhaps the most important thing to remember when trading the US dollar is the shrinking US dollar liquidity seen in financial markets lately. The overnight reverse repo facility, also known as ON RRP keeps rising, reaching close to $1 trillion lately.

Because the Fed raised the interest rate on the ON RRP by five basis points at its June meeting, it offered an incentive to use it. The pick-up in the volume means that the actual US dollar liquidity in the system is shrinking – a positive development for US dollar bulls.

In other words, the increase in the liquidity provided via the quantitative easing programmes is already offset by the usage of the ON RRP. Simply put, there is an abundance of money in the United States that needs to be parked overnight. It makes the quantitative easing programmes less effective, so yesterday’s message is not a game-changer for US dollar bulls. Quite the opposite.


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