On December 18, 2013 the Federal Open Market Committee (FOMC) announced they’d taper their massive bond-buying program by US$10 billion per month beginning in January 2014. While market participants and analysts had long obsessed over if and when taper would begin, market interest rates had already begun adjusting to the quickly approaching reality of reduced purchases. But have market interest rates substantially adjusted to a new fundamentally driven equilibrium, or will reduced purchases drive interest rates even higher from here?
From September 2011 through April 2013, long-term interest rates were held down by market confidence in the FOMC’s promise to hold the fed funds rate close to zero indefinitely and an open-ended long-term asset-purchase program. Back in May 2013, Fed Chairman Ben Bernanke brought up the idea that long-term asset purchases may not persist forever, which led ten-year U.S. Treasury rates to rise by 130 basis points (1.3%) over a four-month period. Read more
On Wednesday, the Federal Reserve recognized the fundamental improvements in the U.S. economy and announced that, in January, it would begin paring back its bond-buying program by US$10 billion per month. This is the “taper” that everyone’s been talking about. The Fed had their first window at tapering back in September, when just the suggestion that tapering was a possibility was enough to send markets shuddering. The Fed’s communication machinery seems to have been more “well-oiled” this time around because both the Dow and the S&P 500 ended Wednesday at record highs. This means that markets are seeing the taper for what it is, a sign that the U.S. economy is on a path of stable growth.
The possible cause of concern is that the market panics if economic data in early 2014 isn’t as rosy as it has been in recent months. With the taper now official, it’s important to understand that tapering isn’t an inevitable one-way street. The Fed has reserved the right to slow, halt, or reverse the taper if economic conditions warrant. Read more
When the sun rises on December 19th, I believe there’s an even chance that the Federal Reserve will have announced that they’ll begin tapering their bond-buying program that began in September 2012. I’d put 50/50 odds on an announcement of tapering their US$85 billion per month program of quantitative easing, and there are several fundamental reasons that back up my beliefs.
The potential federal budget deal that arose late in the day on Tuesday, December 10 between House and Senate negotiators is the most recent, albeit least important, piece of evidence paving the way for a December taper. Read more
For those involved in trading the fixed income markets, August is usually one of the more mundane months. Issuance of new corporate debt slows down significantly since many global investment professionals are on vacation, forced two-week leaves, or holidays, which results in liquidity that is much more challenging. But unlike past years, we’re entering into a September time frame that is poised to be anything but boring, thus causing a likely increase in volatility. So just like the coming attractions at your local movie theater, this is what we have to look forward to in the month of September:
Specific events and their release date:
- “The Last Picture Show” (September 6) – On this Friday, the final major piece of the employment puzzle, the August non-farm payrolls, will be released to the market. This will either confirm the prevailing wisdom regarding the underlying strength of the U.S. economy and the likelihood of tapering of the Fed’s quantitative easing program, or it will provide a difficult conflicting perspective only days before the FOMC meeting. Read more
Several Fed presidents, and “Big Ben” Bernanke himself, have been spending the last week or so trying to convince markets that their program of quantitative easing isn’t on the immediate chopping block and that any eventual tapering would be contingent on continued economic improvement. They’ve tried speeches, press conferences…maybe it’s time for a novelty song, sung to soothe markets back toward normality?
“Tiptoe through the Taper”
by ‘Big Ben’ Bernanke
- Sung to the tune of “Tiptoe through the Tulips” by Tiny Tim, accompanied by ukulele
Panic, after the meeting,
After the meeting of the F-O-M-C
Come tiptoe through the taper with me. Read more
Today, the Federal Reserve announced that it will keep its foot on the easy-money pedal until the unemployment rate drops below 6.5% or inflation looks to go above 2.5%. The proposal has been getting some press as of late (you can see my recent post after Fed Vice Chair Yellen brought up the idea in November). This is almost exactly what Chicago Fed president Charles Evans proposed back in 2011. Well, Evans has evidently convinced everyone else at the Fed. Read more
In his high-profile speech to the New York Economic Club yesterday, Fed chairman Ben Bernanke didn’t give any new thoughts on monetary policy. He did reaffirm his view from September – that the Fed will be accommodative not just until the economy recovers, but until it’s clear that the recovery is sustainable.
…we expect – as we indicated in our September statement – that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In other words, we will want to be sure that the recovery is established before we begin to normalize policy.
However, there were some interesting thoughts about the fiscal cliff (a term that Bernanke himself coined) and on where we are headed post-cliff. First, and not surprisingly, Bernanke was really concerned about the fiscal cliff and the elevated risk of a recession if a deal is not reached. Second, though, dear Ben was downright sunny about the U.S. economy in the event that Washington can make a deal on fiscal policy. Read more