Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  Taper Tantrum Two?
Posted Under: Double Dip • Government • Inflation • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending • Bonds • Stocks
To drive home his commitment to easy monetary policy and low interest rates in mid-2020, Federal Reserve Chairman Jerome Powell declared the Fed was not even "thinking about thinking about raising rates."

The Fed meets again later this week and, very likely, is still not thinking about thinking about raising rates.  But that's only part of the Fed's tool kit.  Bond purchases are another, and have been running at a pace of $120 billion per month ($80 billion in Treasuries and $40 billion in mortgages).  With inflation up, and the economy growing, the Fed is most certainly thinking about how to "taper" this bond buying.

As a result, some investors are worried about the impact on financial markets.  Back in 2013, when Fed Chairman Ben Bernanke hinted that the Fed would slow the pace of quantitative easing, the 10-year Treasury yield jumped from roughly 1.7% to 3.0%, while the stock market hit an air-pocket.  This rough patch for markets was famously dubbed the "Taper Tantrum."

That financial turbulence was enough to put Bernanke and the Fed back on its heels, and they ended up postponing actual tapering until the beginning of 2014.

So, what happens this time?  It's true that monetary stimulus has been a key part of the current recovery from pandemic shutdowns.  However, with so much liquidity in the financial system, we are skeptical that a policy shift toward tapering would create the same kind of market response for a few reasons.

First, the bond market has experience with tapering.  When tapering finally ended in October 2014, bond yields were back down to about 2.3%.  In other words, the tumult in markets was temporary.  Eventually, the Fed didn't just taper, it shrunk its balance sheet, which bottomed in August 2019 when the 10-year yield was back down to about 1.6%.  So, after all the fear about tapering, yields eventually fell back to where they were before Bernanke even talked about tapering in the first place.

Second, the US is awash in monetary liquidity, and will remain so through any tapering and well beyond.  That's why the Fed is currently conducting massive reverse repo operations.  There is so much cash that the financial system is perfectly willing to park it at the Fed...which, if you think about it, is a kind of self-tapering.  The money is just not necessary for economic growth.

Third, the need for Fed bond buying to finance government spending is waning.  President Biden originally asked for close to $4.3 trillion in extra spending for the next ten years, but Congress has balked.  The White House might have to settle for as little as $1 trillion, maybe even less, depending on negotiations with Congress.  Moreover, part of the spending package may come from money re-purposed from prior spending bills.  No wonder bond yields fell last week even while consumer prices rose rapidly.

Last, it's important to keep in mind that back in 2013, many, many investors were worried about a double dip recession.  As a result, when the Fed said growth was strong enough to taper, higher bond yields were a sensible response.

Today, investors see rising growth due to reopening and higher inflation because of easy money.  This is not 2013, when consumer prices were up only 1.7% in June versus the prior year.  Now, when a taper is announced it'll be the Fed signaling it's getting slightly more serious about inflation.

A taper at this point, is NOT tightening.  As a result, yields should be higher a year from now, but a tantrum-like surge is unlikely.

Brian S. Wesbury  Chief Economist
Robert Stein, CFA – Deputy Chief Economist


Click here for a PDF version
Posted on Monday, June 14, 2021 @ 11:01 AM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
 PREVIOUS POSTS
COVID-19 Tracker 6/10/2021
The Consumer Price Index (CPI) Increased 0.6% in May
Recovery Tracker 6/8/2021
The Trade Deficit in Goods and Services Came in at $68.9 Billion in April
There’s Nothing Normal About This Recovery
Nonfarm Payrolls Increased 559,000 in May
COVID-19 Tracker 6/3/2021
The ISM Non-Manufacturing Index Increased to 64.0 in May
The ISM Manufacturing Index Rose to 61.2 in May
Recovery Tracker 6/1/2021
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.