Are We Talking About, Talking About Tapering?

We think one of the more iconic phrases ever spoken by a central banker is “We’re not even thinking about thinking about raising interest rates,” by Fed Chair Jerome Powell at a June 2020 Fed press conference. As we sit here nearly a year later, it doesn’t seem much has changed as the Fed continues to affirm its policy of zero interest rates, despite a rapidly improving economy and growing inflationary pressures.

That said, zero interest rates are not the only tool the Fed has deployed to help see the economy through the pandemic driven crisis of the past year and a half. The Fed has also been purchasing $120 billion worth of Treasury and mortgage-backed securities each month, all with an eye toward keeping the cost of capital low for consumers and corporations and ensuring fully functioning credit markets. And on that front, last week we learned from the release of the April 2021 Federal Open Market Committee meeting minutes that some Fed members think it is time to at least begin talking about a plan for adjusting (e.g., slowing) the pace of asset purchases (what Wall Street refers to as “tapering”). 

That slight shift in Fed sentiment was enough to roil risk assets midweek as investors contemplated the possibility that the Fed’s very accommodative monetary policy might be ending sooner than expected. We don’t expect a meaningful change in Fed policy over the coming months; that said, we believe uncertainty around the direction for monetary policy longer-term will persist and that uncertainty will continue to be additive to market volatility.

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Tagged: Tim Holland, weekly wire, market perspectives, U.S. economic growth