The Fed, Closer to Tapering Asset Purchase Ahead of Schedule

Published on

The rebound in inflation and the steady economic upturn in the U.S. are leading investors to speculate on an early withdrawal of stimulus. Since tighter monetary policies could hamper the rebound, members of the Fed’s Open Market Committee (FOMC) are weighing on reducing the purchase program, the first step towards monetary normalization.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2021 hedge fund letters, conferences and more

The FOMC considers that proper planning is key to avoiding surprises, especially after the U.S. Central Bank stunned the market with the advance of two interest rate hikes in 2023 “as they raised headline inflation expectations to 3.4% for 2021,” as informed by FOX Business.

An Early Withdrawal Of Stimulus

According to last appointment’s notes, several of the attendees were confident that the conditions are in place for a withdrawal of the stimuli ahead of schedule, while others believe that there is no evidence to proceed with the reduction of the bond purchasing program set at $120 billion per month, to keep credit cheap.

This was enough to prevent unanimity on the reduction in purchases.

After the press conference, Chairman Jerome Powell told reporters that officials had started "talking about talking about" tapering, as he expects “that we'll be able to say more about timing as we see more data, basically… There’s not a lot more light I can shed on that.”

There is also no unanimity on the strategy to follow once the tapering kicks in. Some Fed officials were in favor of reducing the acquisitions of mortgage bonds before the purchases of Treasury bonds, in light of the valuation pressures that are being registered in the real estate market.

With no consensus achieved, participants agreed to continue evaluating the progress of the economy towards the committee’s objectives and to begin discussing their plans to adjust asset purchases. Any adjustments will be notified in advance.

Fed expected to roll-back asset purchases later in 2021

Fox Business points that Wall Street is expecting the Fed to reveal more about the timing of tapering at the central bankers gather in August during their annual retreat in Jackson Hole, Wyoming.

Mark Haefele, UBS Global Wealth Management’s CIO said, “If the U.S. economic recovery continues to accelerate to a sufficiently robust level into the summer, the Fed is expected to signal rolling back its asset purchases later this year… But the actual tapering would only take place in 2022, and we believe markets have largely priced in this expectation.”

Should officials shrink the size of the bond-buying program, the ghost “taper tantrum” of 2013 would rear its head. Back then, Chair Ben Bernanke suggested such a move, triggering a spike in bond yields and causing huge losses for their holders.