reporter2
24-09-21, 09:41
Fed seems to have learned from infamous 2013 taper tantrum
Sep 24, 2021
THE US Federal Reserve ripped the plaster off on Wednesday, confronting markets with pain long seen as inevitable, and replacing a sense of anxiety with a sense of relief.
In its latest policy statement, the Fed said it may begin "tapering" bond purchases as soon as its next meeting on Nov 2 and hike interest rates as soon as next year, in a clear signal that the retreat from costly pandemic-era stimulus programmes had begun.
Various strategists said that the central bank had learned from the infamous "taper tantrum" of 2013, when a similar signal caused a market correction by carefully foreshadowing Wednesday's decision.
"The Fed struck a positive tone, acknowledging that the US economy is strong enough to stand on its own two feet," Chris Zaccarelli, the chief investment officer at financial-advice network the Independent Advisor Alliance, wrote in a note to clients.
The central bank had hinted since midsummer it would soon begin a gradual retreat from backstopping credit markets.
The Fed had purchased at least US$120 billion worth of US Treasury and mortgage bonds every month since June 2020.
At first, investors wondered if anything would be enough to save markets from the effects of the pandemic.
The conversation shifted in the middle of this year as unemployment rates had fallen steadily, moving the Fed's focus to the other barrel of its double-barrelled mandate - inflation.
The annual price increases for goods other than food and energy have consistently topped the Fed's 2 per cent target, making investors fear that the economy was overdosing on central-bank stimulus.
For much of the summer, the Fed insisted that inflation was just a "transitory" phenomenon, a side effect of the medicine provided for the wildly successful post-pandemic recovery.
But the medicine, sometimes, can become worse than the disease. Recent consumer surveys have indicated that price increases are eroding confidence and discouraging purchases of all kinds.
In the housing market, in particular, buyers appeared to be scared off by the historic rise in home values.
On Wednesday, Fed chair Jerome Powell conceded that supply-chain dysfunction had created risks of persistent inflation.
At least one brokerage, however, said that Mr Powell was unlikely to become an aggressive inflation-fighting hawk. "This is still a very dovish Fed that is highly committed to achieving higher inflation and a hot economy," said strategists at brokerage Bank of America Global Research. "But in the face of supply side constraints and growing signs of persistent inflation, it appears that those objectives could be met earlier."
Stocks were up sharply ahead of the Fed's statement and added to gains in the immediate aftermath. The Dow Jones Industrial Average has now recovered the bulk of the losses associated with the near-collapse of developer giant China Evergrande Group.
But the stock market may not have fully digested the shock. Judging by movements in the Treasury market, where yields rose, bond traders view Wednesday's move as transformational.
The taper tantrum may well be delayed rather than averted.
Sep 24, 2021
THE US Federal Reserve ripped the plaster off on Wednesday, confronting markets with pain long seen as inevitable, and replacing a sense of anxiety with a sense of relief.
In its latest policy statement, the Fed said it may begin "tapering" bond purchases as soon as its next meeting on Nov 2 and hike interest rates as soon as next year, in a clear signal that the retreat from costly pandemic-era stimulus programmes had begun.
Various strategists said that the central bank had learned from the infamous "taper tantrum" of 2013, when a similar signal caused a market correction by carefully foreshadowing Wednesday's decision.
"The Fed struck a positive tone, acknowledging that the US economy is strong enough to stand on its own two feet," Chris Zaccarelli, the chief investment officer at financial-advice network the Independent Advisor Alliance, wrote in a note to clients.
The central bank had hinted since midsummer it would soon begin a gradual retreat from backstopping credit markets.
The Fed had purchased at least US$120 billion worth of US Treasury and mortgage bonds every month since June 2020.
At first, investors wondered if anything would be enough to save markets from the effects of the pandemic.
The conversation shifted in the middle of this year as unemployment rates had fallen steadily, moving the Fed's focus to the other barrel of its double-barrelled mandate - inflation.
The annual price increases for goods other than food and energy have consistently topped the Fed's 2 per cent target, making investors fear that the economy was overdosing on central-bank stimulus.
For much of the summer, the Fed insisted that inflation was just a "transitory" phenomenon, a side effect of the medicine provided for the wildly successful post-pandemic recovery.
But the medicine, sometimes, can become worse than the disease. Recent consumer surveys have indicated that price increases are eroding confidence and discouraging purchases of all kinds.
In the housing market, in particular, buyers appeared to be scared off by the historic rise in home values.
On Wednesday, Fed chair Jerome Powell conceded that supply-chain dysfunction had created risks of persistent inflation.
At least one brokerage, however, said that Mr Powell was unlikely to become an aggressive inflation-fighting hawk. "This is still a very dovish Fed that is highly committed to achieving higher inflation and a hot economy," said strategists at brokerage Bank of America Global Research. "But in the face of supply side constraints and growing signs of persistent inflation, it appears that those objectives could be met earlier."
Stocks were up sharply ahead of the Fed's statement and added to gains in the immediate aftermath. The Dow Jones Industrial Average has now recovered the bulk of the losses associated with the near-collapse of developer giant China Evergrande Group.
But the stock market may not have fully digested the shock. Judging by movements in the Treasury market, where yields rose, bond traders view Wednesday's move as transformational.
The taper tantrum may well be delayed rather than averted.