The return of the Fed Tapir at long last – October 2021
After the pandemic clobbered the market and the economy locked down last year, the Fed resumed aggressive purchasing of fixed income securities to support financial markets and keep interest rates low. All thoughts of tapering their support were banished for some time until this year’s strong economic growth and the appearance of higher-than-expected inflation started discussion of the need for Fed action to stop pouring fuel on the economic fire and potentially allowing the inflation genie to escape the bottle.
And there he is, the terrible tapir! Chairman Powell, in recent days, has acknowledged the need for tapering the Fed’s aggressive support for the markets sooner than planned, and we are now hearing that the critter might emerge as early as November of this year.[i] And maybe the vicious beast will be followed by higher short-term interest rates next year. Imagine.
Mr. Powell keeps asserting that inflation should be “transitory,” but he is now having to acknowledge that factors beyond the Fed’s control, especially disruptions in the supply chain, are making it difficult to say when it will slow down. It was supposed to be slowing already, in his view, but others, like our old pal Mohamed El-Erian, have expressed serious doubt and are expecting more sustained inflation. [ii]
The last week of September saw a sharp jump in long-term rates, with the 10-year Treasury breaking 1.50% for the first time in months.[iii] Stocks proceeded to have a poor September, resulting in a lackluster third quarter, with the S&P up only slightly and other equities down a bit. Bonds are basically flat. So, all in all, little change from last quarter, still a pretty good year so far.
Meanwhile in Washington, DC the drama continues–the shutdown averted at the very last minute, negotiations over huge spending bills seemingly going nowhere fast, everyone upset. Welcome to our world, 2021.
Meanwhile, the sun rises, things go well, and things go badly; life goes on. Regardless of current events and all the emotions they may stir, we know above all that these events are inherently unpredictable, and the markets even more so. The whole pandemic thing has given us one more powerful example of how fast and unpredictably things can change and how a disciplined approach to investment management can navigate troubled waters.
Be of good cheer!
[i] Timiraos, K. and Timiraos, N., 2021. Powell Says Fed Faces ‘Difficult Trade-Off’ if Inflation Doesn’t Moderate. [online] WSJ. Available at: <https://www.wsj.com/articles/powell-says-fed-faces-difficult-trade-off-if-inflation-doesnt-moderate-11633017666?mod=lead_feature_below_a_pos1> [Accessed 30 September 2021].
[ii] Ft.com. 2021. Bond sell-off is a warning to the Fed. [online] Available at: <https://www.ft.com/content/225cb41f-2cfc-42de-9066-d0ce86a2fed7> [Accessed 30 September 2021].
[iii] Verlaine, J., 2021. U.S. 10-Year Treasury Yield Tops 1.5%. [online] WSJ. Available at: <https://www.wsj.com/articles/u-s-10-year-treasury-yield-tops-1-5-11632756798> [Accessed 30 September 2021].
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