Back in March 2020, the US Federal Reserve slashed interest rates to zero and, since June of last year, it has been buying significant quantities of assets. Now all eyes are on when the Fed will reduce its $120bn-a-month buying programme, which includes $80bn in Treasury debt and $40bn in mortgage-backed securities.
The Fed chair Jerome Powell has consistently said that the rise in US inflation this year is temporary. Data released on 11 August showed that US consumer prices slowed in July to a growth rate of 0.5%, down from 0.9% in June. This was the largest month-to-month inflation drop in 15 months, according to the US Department of Labor.
With inflation seemingly slowing and the latest jobs report showing steady growth, the case for starting to reduce asset-purchasing sooner rather than later has been strengthened. While many Fed officials have remained tight-lipped about when they might start to taper, most economists polled by Reuters believe the Fed will make an announcement next month. They also expect the US jobless rate to remain above its pre-pandemic level for at least a year.
Fed tapering: time to dial back
Assuming the announcement comes next month in September, then the tapering is likely to begin in earnest in October.
“It would be my view that if the economy unfolds between now and our September meeting ... if it unfolds the way I expect, I would be in favour of announcing a plan at the September meeting and beginning tapering in October ” Dallas Fed president Robert Kaplan told CNBC on 11 August.
Kaplan, who is known to be outspoken, is comfortable that now is the time to pull back on the stimulus, given the recent data and current conditions.
“The reason I’m saying we ought to begin tapering soon is I think these purchases are very well equipped to stimulate demand. But we don’t have a demand problem in the economy,” he added.
The Kansas Fed president, Esther George, has also voiced her support for bringing an end to the bond buying.
“With the recovery underway, a transition from extraordinary monetary policy accommodation to more neutral settings must follow,” George said in a speech at a virtual conference sponsored by the National Association for Business Economics on 11 August, according to Reuters. She added: “The time has come to dial back the settings."
Reduced uncertainty
The last time the Fed tapered was in 2013, when it wound down its asset-buying programme that had started in response to the 2007-to-2009 financial crisis. This paring back of quantitative easing in 2013 led to US treasury yields rising sharply, a move that became known as “taper tantrum”.
While there will be investors who are rightly nervous that there will be another tantrum, some experts think this is a slight overreaction.
Speaking to Reuters, David Chao, a Hong-Kong based strategist at Invesco, said: “The Fed has done a fantastic job communicating its policy stance and future actions, so I don’t think there will be any uncertainty.”
Eric Winograd, a senior economist at AllianceBernstein, agrees that both the Fed and investors are better prepared this time around.
“We don’t think the taper itself triggers that tantrum – it was the surprise turn in monetary policy,” he argued in a research note. “The Fed has learned from that error: this time, it will lay the groundwork well in advance to avoid any surprises. Yields may rise gradually – as we expect – but we don’t foresee a tantrum.”
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