UOB Economic-Treasury ResearchCompany Reg No. 193500026Z

US FOMC Minutes: Fed Gives October Timeline For End Of QE,Warns About Complacency On Risks

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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 Fed’s 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 final 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 fixed rate overnight reverse repurchase agreement (ON RRP) below the IOER rate could play a useful supporting role by helping to firm the floor under money market interest rates.”

� The FOMC participants also discussed the appropriate time for making a change to the Committee’s 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 liftoff (of interest rates) would be best, with most of these participants preferring to end them after liftoff.

� 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 fixed-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 sufficient uncertainty about the path of the economy and monetary policy.”

� While offering no new clues on the timeline of Fed’s 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 officials who believe US inflation could remain too low for the Fed’s 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 inflation,” 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 inflation moves back toward the 2% target. That sentiment was far from unanimous, as “some others expected a faster pickup in inflation or saw upside risks to inflation 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 first FFTR hike but the Fed’s 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 NotesThursday, 10 July 2014 Page 2

URL: www.uobgroup.com/researchEmail: 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 reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, 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 Fed’s monetary policy formulation is data-dependent and not expected to follow in a mechanical fashion, so there remains significant 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 Yellen’s 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/files/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