In 2013 the Federal Reserve last struggled with determining how and when to end the bond-buying program it initiated to stabilize the economic distress brought by the 2007-2009 financial crisis and global recession.
The Fed finally unveiled its plan to wind down the quantitative easing programs (QE) toward the end of 2013. The then-Fed Chairman Bernanke scared investors before Congress in May 2013, triggering the taper tantrum.
The Fed decided to wait until 12/13/13 to announce the reduction of its bond-buying program. The official start of the taper began promptly in January 2014. The purchases ended on 10/29/14 after the Fed accumulated $4.5 trillion in assets.
The lessons of the last taper during 2013-2014 may come to fruition as the Federal Reserve transitions to Taper 2.0. Fed Chairman’s Powell move to accelerate the current taper program has left many investors wondering whether this will lead to a soft landing or result in a policy mistake. Investors are also deciding the implications, if any, of the unwinding of the central bank’s massive balance sheet on financial markets and investment portfolios.
Fixed-income investors panicked when the Fed announced its last taper. So far, investors have not reacted too negatively to the recent Taper 2.0 news. Could it be that many investors have already seen what the Fed did in the past taper? The normalization of rates did not lead to a catastrophic risk-off market sell-off as many market pundits anticipated.
In 2013, many investors feared the Fed would raise the Fed Funds rate from the target level of 0% to as high as 4-5%. In hindsight, this did not occur. Will the Fed stop raising rates just below 2% this time around?
The Fed’s transparency and messaging of its tapering program may have been discounted in the marketplace already. The Fed Funds rates have jumped from a historic low of 0.398% (3/9/20) to a recent high of 1.765% (3/30/21), possibly in anticipation of the Fed’s Taper 2.0 announcement.
Many investors fear the decrease in liquidity in the financial market can lead to a melt-down as the Fed pulls back on its asset purchase. However, if the interest rate normalization is successful, this will ease the concerns about inflation and allow for the resumption of the bull trend.
It may not play out the same way this time around, as history does not always repeat itself, but it often rhymes.
A brief review of various asset classes during the Fed’s reduction in its bond market purchases from 12/13/13 to 10/29/14 can offer valuable insights. It can also provide a road map to navigate during 2022 and beyond.
Have a wonderful and safe holiday season!