Although Chair Powell didn’t specifically say when ‘The Taper’ was coming, it is clear the FOMC will announce it at the November 3 meeting and taper by $15 billion a month in December. So Here comes the Taper! Treasury yields have subsequently soared but not because of ‘The Taper’. The Bank of England indicated a rate hike (not simply a taper) in March was possible which led to a jump in global bond yields. This comes as investors are starting to realize inflation won’t be transitory. I have expressed this view for months and detailed the reasons why in the August and September Macro Tides.
In our weekly conversation last Friday Blake Morrow and I covered a lot of ground. For months, I have expected the FOMC to announce its Taper plans at the November 3 meeting and Powell’s comments virtually cemented this expectation. We also discussed the outlook for the S&P500, Dollar, Treasury yields, and the long term impact on China and Emerging economies from Evergrande.
Here Comes the Taper
Chair Powell’s press conference was noteworthy for what he didn’t say and what he did say. Chair Powell gave no specific information on when the FOMC would announce their tapering plans nor did he say how much the FOMC would shave from the $120 billion in monthly purchases. He did say that a majority of FOMC members agreed that the FOMC’s 2% inflation target had been achieved. With Core inflation measures north of 4.0% this revelation could be described as FOMC members admitting they could have had a V-8! Chair Powell’s assessment of the labor market though was noteworthy. Powell said that in his view the labor market had met his expectations and that most of the FOMC members agreed. Without saying anything specific Chair Powell confirmed that the FOMC will announce its tapering plans at the November 3 meeting.
How much will the FOMC taper each month? Chair Powell said the taper would end in mid 2022. The only way that is possible is if the FOMC reduces the monthly purchases by $15 billion a month which would allow the taper to end in 8 months. After announcing the plan on November 3, the FOMC will likely begin the taper process in December and be finished at the end of July next year.
There has been a fair amount of hand wringing about how the financial markets will handle tapering. As noted previously, the Fed’s balance sheet will grow another $480 billion if they taper $15 billion a month. This is not tightening but is a lessening of accommodation. The stock market is not likely to reel at the beginning of tapering, but may become vulnerable as it progresses. The Fed has been pumping 100% oxygen into the trading room since March 2020. Over time tapering will reduce the amount of oxygen in the room. Running a mile at sea level is a lot easier than running it in Denver at an elevation of 5,280 feet. In the second quarter of 2022 the oxygen level may be closer to 90% and leave the market winded.