In an attempt to fine-tune QE expectations the Fed talked itself into a tapering plan that it was ultimately uncomfortable following through with. What we have is a committee that is divided on where to progress with policy, leaving a lot of uncertainty over what could be a very uneven tapering path.
The FOMC minutes saw a repeat of the view that it wanted to start tapering this year and for QE to end in the middle of next year. An early resolution to the US government shutdown and debt ceiling standoff would allow the Fed to taper in December but a significant risk remains that tapering will be pushed out into early Q1 2014.
The minutes reveal a division in thinking within the Fed and the more significant impact will be to make the tapering path more uneven. What has been surprising is the way in which the Fed has failed in its communication, creating a higher than normal noise/signal ratio.
Whether this will change under Yellen is debatable as under Bernanke she was already in control of a subcommittee focused on the Fed’s communication challenges.
The composition and speed at which the Fed tapers will play an important role in moulding how the market views the next step in the process, i.e. how the Fed communicates the likely path of the Fed Funds rate.
A more gradual tapering path is likely as the Fed will be cognisant that market perceptions of a speedy exit will lead to a premature tightening of financial conditions via higher Treasury/mortgage rates.