The Fed has cried wolf as it relates to tapering their bond purchases, but this time we believe we will finally hear detailed plans for reducing their $120 billion a month buying program. Our confidence stems from Jay Powell’s reappointment in February. It serves as a lock, given Janet Yellen’s continued support of Powell. We felt that Powell would delay tapering as to not jeopardize his reappointment with some unforeseen market volatility caused by the tapering. That said, the Fed has not been sitting on their hands this whole time. All other buying programs, besides the purchase of $80 billion treasuries and $40 billion in mortgages a month, have been discontinued and the Fed has even sold all its corporate bond positions over the past 3 months.
The question for us is, how will the tapering announcement impact investors? We expect the yield curve to flatten initially and then for yields to resume an upward trend. Often times when the Fed first takes action to remove stimulus, there is a “relief rally” in 30-year bond prices that brings down long-term yields. The relief is from knowing the Fed is reducing the amount of fuel they are pouring onto the inflation fire. Shorter-term yields should continue to rise as investors steadily move up their timeframe for the first-rate hike which now believe will be almost immediately after the purchases have ended so sometime in the 3rd quarter of next year.
The impact on inflation will be almost nothing, though as the Fed is somewhat powerless to resolve the supply chain-related cost pressures.
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