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Market Update

Fed minutes highlight taper talk

August 23, 2021
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Prior week summary

The major U.S. equity indices moved lower for the week, falling from all-time highs, as market participants digested mostly weaker-than-expected economic data, the continued spread of the COVID-19 delta variant, and the minutes of the latest FOMC meeting. While the 10-year Treasury yield has seen a protracted spell of volatility this quarter, last week proved much calmer as the 10-year Treasury yield traded in a mostly tight range and ended the week at 1.26%, approximately three basis points lower than where it began the week. Aside from the week’s scheduled economic releases, market participants circled Wednesday on the calendar in expectation of the release of the latest FOMC meeting minutes. The minutes offered new data points on where Fed officials stand regarding the eventual tapering of the current $120 billion per month asset purchase program. Specifically, the minutes revealed that most Fed officials see the launch of the tapering program beginning later this year if the U.S. economy continues to recover in line with expectations. According to the minutes, “Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s ‘substantial further progress’ criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal.” Regarding the composition of the tapering program, several officials argued that the agency MBS portfolio should see a larger pullback in purchases relative to the Treasury portfolio at the onset of the program given the overall strength of the housing market. Finally, many officials also expressed the importance of stressing that there is not a “mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate.” The next FOMC meeting is scheduled for September 21–22.

Market participants received several high-profile economic updates last week, including retail sales, the Empire Manufacturing Index, and housing starts, among others. Fears that the U.S. economy is reaching peak growth reignited on Tuesday when a report indicated that retail sales unexpectedly fell 1.1% in July, a stark contrast from the upwardly revised 0.7% rise seen in June. The report highlighted a shift to service-sector spending as restaurant spending increased while motor vehicle and e-commerce sales declined. Supply chain bottlenecks remain a source of much consternation and slower growth for the manufacturing industry, an issue that featured prominently in both the Empire Manufacturing Index and Philadelphia Fed Business Outlook Survey releases. The Empire Manufacturing Index fell far below expectations to 18.1 in August, a significant pullback from the record 43.0 level seen in July. Notably, participants’ expectations for prices paid accelerated in July, suggesting that inflationary pressures continue to firm. Looking to the housing market, housing starts fell in July to an annualized pace of 1.53 million starts, below the 1.6 million start consensus expectation. In a bright spot, building permits improved in July to a 1.63 million annualized pace, a modest beat to the consensus expectation. Lastly, the labor market appears to be improving as jobless claims for the week of August 14 declined to a pandemic-era low of 348,000 claims. Market participants will continue to watch the labor market closely as there is a growing consensus among Fed officials that “substantial further progress” has been reached with respect to their price stability goal but that the labor market must show further improvement still.

After a successful launch of the SOFR First initiative on July 26, SOFR swap trading has seen increased volumes week after week. In the third week following the launch of the initiative, SOFR swap traded notional increased to $166.1 billion, just short of a 25% increase from the week prior, and total trade counts increased modestly week over week to 1,542 trades. While all eyes have been on SOFR-based developments in recent weeks, the credit-sensitive BSBY index is looking to reclaim the spotlight as BSBY futures are set to launch on the CME on Monday, August 23.

The look forward

Market participants are gearing up for another busy week of economic data releases with updated figures on new home sales, durable goods orders, jobless claims, the second estimate of second-quarter GDP, wholesale inventories, and consumer spending, among others, dotting the economic calendar. All eyes will turn to the Fed’s annual policy retreat to Jackson Hole beginning Thursday.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

About the author

  • Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

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