Fed Taper Talk Returns: What Does It Mean for You?

With the release of the latest minutes of the Federal Open Market Committee (FOMC), the talk of the Fed tapering its asset purchases has returned. This time, the fear on the part of Wall Street is that the Fed could begin tapering much faster than had previously been expected. And that could have a significant impact on the value of your investments.
Previous taper talk had focused on the FOMC’s dot plots, released after every other FOMC meeting. The latest dot plots had indicated that the Fed looked set to taper sometime in late 2022 or early 2023. That right there, a vague possibility of a taper over a year from now, was enough to send Wall Street into a tizzy, so dependent is Wall Street on the Fed’s easy money to make profits.

With the timelines for the taper being pushed up possibly into this year, Wall Street is waiting anxiously for more indications from Fed Chairman Jay Powell, who will speak today at the Kansas City Fed’s Jackson Hole Symposium. If markets tantrum like they did the last time the Fed threatened to taper, it could be bad news for many investors.

The Taper Tantrum in Retrospective

The taper tantrum refers to the reaction of financial markets to the Fed’s announcement in 2013 that it might begin to scale back the pace of its asset purchases. In testimony before the Joint Economic Committee on May 22, 2013, Fed Chairman Ben Bernanke announced that the Fed might begin to scale back the size of its asset purchases if the economy continued to recover.

At the time, the Fed was purchasing $45 billion worth of Treasury debt and $40 billion of agency mortgage-backed securities (MBS) each month, or about $1 trillion of assets annually. Just the mere hint that the Fed might taper those purchases caused financial markets to panic, with bond yields on the 10-year Treasury bond rising from 2% to 3% within a few months. Stock markets panicked too, with the Dow Jones losing hundreds of points and largely floundering until the end of the year.

The taper tantrum was an indicator that markets had become far too dependent on the Fed’s stimulus for their financial well-being. Not even five years after the 2008 financial crisis, markets were already addicted to easy money. How much more so are markets addicted to the Fed today?

The Fed’s Reaction to the Taper Tantrum

The Fed’s reaction was one of shock. A mere mention of tapering assets purchases, at some point in the future, something which anyone should have assumed would happen at some point, was enough to send jitters through markets. And, not being too far removed from the financial crisis, the Fed blinked.

Rather than following through on its decision to taper, the Fed continued to engage in expansionary monetary policy. The day of Bernanke’s testimony, the Fed’s balance sheet sat at around $3.4 trillion. A year later, the balance sheet was at $4.3 trillion. And it continued to expand that year until the Fed finally began to taper and end its asset purchases in 2014 and 2015.

The Fed’s reaction was not to stand strong in its desire to do what was right for the economy, but rather to capitulate to Wall Street’s desires for easy money. Rather than engaging in monetary policy based on its dual mandate (price stability and full employment), the Fed instead indicated its shift to the guarantor of economic prosperity.
From then on, the Fed reacted to every potential downturn of the stock market with a promise to keep liquidity flowing. Instead of engaging in monetary policy in order to fulfill its dual mandate, the Fed has instead become the backstop of the stock market, captive to Wall Street’s desires.

That doesn’t bode well for the future, as a stock market that is completely dependent on easy money from the central bank for its continued performance is a market that is bound to collapse once that easy money comes to an end. And now that end looks like it could be closer than any of us realize.

What Will the Fed Do Today?

Right now the Fed is purchasing at least $80 billion in Treasury debt and $40 billion in agency MBS every month, or nearly $1.5 trillion per year. It is widely expected that the Fed will begin tapering its purchases in November, or January at the latest.

One of the big questions will be just how much the Fed decides to taper, and how long it will take to finish its asset purchases. Remember how the Fed at one point was trying to draw down its balance sheet, yet quickly made an about face.

If we assume the Fed will reduce its purchases of Treasury bonds by $10 billion in the first month of tapering, expect a $5 billion reduction in agency MBS purchases. Further reductions would likely occur every other month, or every quarter. We might see a reduction to $60 billion in Treasury bonds and $30 billion in agency MBS to start, then 40/20 after 3-6 months, then 20/10, and then finally an end to asset purchases.

Don’t expect asset purchases to end abruptly. Expect the Fed to try to draw out the drawdown, and don’t be surprised to see the Fed reverse course if markets begin to puke or President Biden puts political pressure on Powell to keep supporting the economy. After all the talk of taper, the second go around may end up being just like the first.

What the Taper Means for Your Investments

If the Fed begins to taper, there’s a high likelihood that both stock and bond markets will react negatively. The reduced amount of money flowing to financial markets could very well precipitate a correction in stock markets, while there’s a very high likelihood that bond markets will react negatively too, with lower bond prices and higher yields. For investors who are heavily invested in financial assets like stocks and bonds, that could be bad news.

The reason the Fed is thinking of tapering its asset purchases isn’t because the economy is improving, it’s because inflation is starting to rise out of control. And despite public pronouncements that inflation is only transitory, apparently the Fed doesn’t really believe that. In order to forestall rising inflation, the Fed has decided to start tapering.
While monetary stimulus has traditionally been seen as a benefit for the gold price, that doesn’t mean that gold is going to fall in price if the Fed begins to taper, particularly if stock and bond markets plummet. A major stock market correction would be just as beneficial for gold today as it was in early 2020 when the lockdowns first went into effect. And if inflation continues to rise, despite the Fed’s efforts, that too could benefit the gold price.

The important takeaway from taper talk, however, is that change is coming, and investors who fail to anticipate the effects of those changes could end up seeing those changes reflected in the value of their investments. As with many changes, anticipating the changes and making decisions to protect your investments ahead of time could do a great to deal to protect yourself.

With the outlook for the gold price looking good in the aftermath of the taper, now is the time to start thinking about protecting the value of your investments with gold. Whether you want to buy some gold coins for a little extra insurance, or move existing retirement assets into a gold IRA, Goldco’s precious metals experts can help you make the decision that you think is right for your investments.

Don’t let taper talk turn into taper action before you start protecting your savings. Talk to the precious metals experts at Goldco today to learn more about how gold can help safeguard your savings no matter what the Fed decides to do.