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The Fed’s Taper Rehearsal

The Fed’s Taper Rehearsal

August 19, 2021

The talk is of tapering, and it’s making investors nervous.

The Federal Open Market Committee (FOMC) released the minutes of its April meeting a few weeks ago and its July minutes meeting just yesterday. Both of the reports suggested that should the economy continue to make progress, it may be time to adjust the pace of the Fed’s monthly bond purchase program.1

Equity markets have come under pressure after yesterday's July release with the Dow and S&P 500 both falling around 1% in pre-market action. The minutes suggested that most central banking members agree that tapering their crisis era asset purchasing program will be necessary later this year. 

"the minutes also made clear that an earlier taper does not necessarily mean that the Fed will bring forward plans to start raising interest rates, with many officials believing that the FOMC should 'clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in … the federal funds rate" - Andrew Hunter (Senior Economist at Capital Economics)

With inflation appearing to accelerate, this is the second sign that the Fed is considering such a scaling back. While such a change might be inevitable, it comes with no certain start date.

This doesn’t calm investors’ nerves. After the April minutes were released, and again this week the markets are quickly reacting to the tapering chatter. We'll see if it is resolved as quickly, or if this pullback coupled with the recent highs of the market provides a more meaningful correction.  Memories cast back to the so-called Taper Tantrum of 2013, when the Fed similarly changed direction after years of boosting the economy with easy money. Such mini-dips have happened from time to time since then.2

In addition to its other duties, the Fed has been given the mandates of maintaining stable price levels and maintaining moderate, long-term interest rates. Your financial strategy has been crafted with the understanding that the Fed from time to time will make adjustments in interest rates to accomplish its goals.  Our goal is to prepare you and your portfolios for the dynamic shifts we are seeing take place within the markets. 

1. CNBC.com, May 19, 2021
2. CNBC.com, May 21, 2021

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