As news of the Federal Reserve’s desire to lessen its bond purchase efforts manifests in financial markets like a resurrected ghost from 2013, anxious investors are pondering whether the central bank has taken to heart the lesson of the previous uproar.
The Fed’s decision to hint at tapering its $85-billion-a-month asset purchases at the end of spring 2013 led to a massive investor outcry. In response, treasury yields shot up, stock prices plummeted, and emerging markets experienced seismic unrest.
Startled by the outburst of market volatility, the Federal Reserve was forced to take swift action to assuage investors, guaranteeing that interest rates would remain low for an extended period of time.
This go-around, the Fed has been comprehensive regarding tapering by establishing transparent plans, which appear to have placated markets as the response has been quite mild.
Despite some investors’ fears, the Fed appears to have taken the lessons of 2013 to heart. It is unlikely that a similar situation will arise again anytime soon.
Peter Boockvar, the Chief Market Analyst for The Lindsey Group, commented that he believes the Federal Reserve is still misjudging the market’s response.
In the month of May in 2013, Ben Bernanke, the Chairman at the time, caused a stir among traders when he asserted that the Federal Reserve was liable to commence cutting back on its bond-purchasing strategy before the end of that same year.
Acting in response to the economic turbulence brought on by the financial crisis, the Federal Reserve initiated quantitative easing, a strategy centered around purchasing bonds, thereby bringing down long-term interest rates and propelling borrowing and spending.
Due to the general consensus that the Federal Reserve would continue buying bonds until economic conditions improved, Bernanke’s sudden announcement of the potential tapering of bond purchases later that year came as a surprise to many investors.
From the first week in May to the end of June, there was a noticeable rise in yields on 10-year Treasury notes. This surge, from 1.6 percent to almost 2.4 percent, caused fear throughout stock markets, as the S&P 500 shed more than five percent off its record high. Rising yields also had a destabilizing effect on emerging markets with investors swiftly removing their money from riskier assets.
The outburst of emotion left the Federal Reserve utterly dumbfounded. Subsequently, Bernanke and other high-ranking officials out of the central bank took steps to calm investors by highlighting their plan to maintain minimum borrowing costs beyond anticipated timelines.
When the Fed elected to keep their plans for tapering in September, the repercussions had already been felt. Now widely referred to as the “taper tantrum,” this episode is said to have been a vital component in the Fed’s resolution to not increase rates for almost seven years.
The Fed is looking toward the future with hope; seizing upon the present trend of economical expansion, there has been a recent focus on phasing out its bond-buying program.
Janet Yellen, the leader of the central bank, publicly stated in March that if general economic well-being is maintained, the Fed may begin to lower their budget for bond purchases before summer arrives. With a concise and unequivocal tone, Yellen has recently set forth their intentions concerning this matter.
Yellen emphatically asserted that the Fed would take a gradualist approach to decreasing the program and showed no urgency to hike the rates.
Despite the Fed’s recent musings regarding tapering, the markets have so far stayed rather serene. Yields on 10-year Treasury bonds have elevated marginally, yet remain beneath the heights which were observed in 2013. Meanwhile, the S&P 500 is trading close to its all-time apex.
Despite reassurance from some parties, some investors are concerned that a repeat of the 2013 tantrum could be on the horizon courtesy of the Federal Reserve.
Peter Boockvar, the chief market analyst at The Lindsey Group, believes that the Federal Reserve has not yet given sufficient consideration to the manner in which the markets may respond.
Boockvar noted that the current proposed decrease to the Fed’s efforts might not occur if the economy weakens or inflation continues to stay inactive.
He stated that the Federal Reserve was still taking a huge risk.
Pros contend that the Fed has stepped up their game considerably since 2013, prepared to responsibly confront any potential market turbulence.
McBride, Bankrate.com’s chief financial analyst, remarked that the Federal Reserve had been explicit about their targets and had taken their missteps in 2013 into account.
McBride claimed that the Federal Reserve will not be making any rash decisions concerning rate alterations or asset acquisition, and will be sure to provide ample notification to investors when any changes occur.
He expressed his belief that the Federal Reserve has done very well in guiding people’s outlook, and there would not be a recurrence of the events of 2013.