Markets were expecting the Fed to announce the beginning of its tapering of assets purchases at its latest Federal Open Market Committee (FOMC) meeting. And while the Fed didn’t announce tapering at its latest meeting, its statement was nonetheless deemed to be hawkish, perhaps even more hawkish than originally expected. That could end up roiling markets in the future.
To be clear, the Fed’s tapering isn’t actually hawkish, nor is it a tightening of monetary policy. It’s merely a slowing of the rate at which the Fed is expanding its balance sheet, with the goal of eventually stopping the expansion next year.
At $8.5 trillion and counting, the Fed’s balance sheet is the largest it has ever been. And under current asset purchase plans the Fed is expanding that balance sheet at nearly $1.5 trillion a year.
That $8.5 trillion figure is more than double what the Fed’s balance sheet was last spring, one of the major reasons behind both the surge in stock markets this year and more recently the surge in inflation. Obviously the Fed is beginning to worry about rising inflation, which is why it is making noises about ending its tapering. But the way it goes about tapering could end up wreaking havoc on your investments.
When Will the Fed Begin Tapering?
The big question that everyone wants to know is when the Fed will begin tapering. Many had expected the taper to be announced at September’s FOMC meeting, with tapering then likely beginning in November. Now we can’t expect an announcement on tapering until November, with December likely the earliest that tapering would begin, and January perhaps a more likely starting date.
Since Fed Chairman Powell has previously stated that he thinks mid-2022 would be a good time to finish tapering, the Fed’s recent delay would compress an 8-month tapering timeline into potentially 6 months. Since the Fed’s asset purchases have been driving stock market highs, accelerating the tapering of those purchases will drastically reduce the amount of money making it to markets, which could send stock prices lower quicker than they otherwise would have gone.
Why Might the Fed Speed Up Tapering?
You might ask yourself why the Fed is in such a rush to finish tapering its asset purchases. The last time the Fed tried to tighten monetary policy, by both raising its target federal funds rate and reducing the size of its balance sheet, it attempted to do so slowly. The process of balance sheet normalization, in particular, likely would have taken years to complete.
Yet the Fed came under significant pressure after only a few months to discontinue both its interest rate increases and its balance sheet reduction. In fact, the Fed did a complete 180, going from tightening monetary policy to the most expansionary monetary policy in its history in a matter of months.
Perhaps this is why the Fed is tightening up its taper timeline this time around. Were the Fed to try to taper over the course of 8,9, or even 12 months, there’s a high likelihood that some sort of shock to markets would result in calls to end tapering and increase easing. With a tight timeline, of 6 or maybe even 4 months, the Fed limits the likelihood of such an event occurring, allowing it to finish its tapering without outside interference.
Of course, the danger in such a quick taper is the same as it was before. Tapering so quickly will put a very abrupt end to the amount of money flowing to financial markets. It’s like an alcoholic or a heroin addict trying to go cold turkey. Even though you know cutting markets off from easy money is the right thing to do, the speed at which it’s being done could very well cause markets to react in precisely the wrong way.
The Fed isn’t supposed to be the guarantor of stock markets, it’s supposed to be focused on full employment and stable prices under its dual mandate. But since the 2008 crisis the Fed has seen more than its fair share of mission creep. Everyone today looks to the Fed as soon as something goes wrong, or as soon as stock markets begin to plummet. Even investors who should know better have put their faith in the “Fed put,” confident that the Fed will step in to bail out markets. But that faith may be misplaced.
Are You Protecting Yourself Against Tapering?
Most people expect stock markets to lose some value once tapering starts, and especially once it finishes. There’s the very real possibility that markets may actually start pricing in some of these expectations in the near future, especially once tapering is officially announced. And that makes it all the more important for investors who don’t want to lose money that they defend themselves against tapering-induced stock market losses as soon as possible.
After all, it’s not a matter of if stock markets crash, it’s a matter of when. And the Fed’s tapering of asset purchases may be the factor that instigates the next crash. Investors who are aware of that and who are able to protect their savings before a potential crash could end up faring better than those who fail to appreciate the dangers and likelihood of a crash.
One method that many investors are using to protect their savings is to move a portion of their assets into precious metals such as gold and silver. There are numerous ways to do this, but among the more popular options is a gold IRA. A gold IRA has the same tax advantages as a conventional IRA, and can be funded with a rollover or transfer from an existing 401(k), IRA, TSP, or similar tax-advantaged retirement account. That allows you to protect the gains you’ve already made in your retirement accounts while benefiting from future price growth of gold and silver.
Another popular option is direct purchases of gold and silver coins or bars. These purchases are made with after-tax dollars, and the coins you purchase can be shipped directly to you. You can store them at home, in a safe deposit box, or if you purchase a really large number of coins, you could think about storage at a bullion depository.
No matter which method you choose to invest in precious metals, their outlook for the future looks bright. When stock markets show signs of weakness, gold and silver often perform well. Take the 1970s, for instance, when both gold and silver averaged annualized gains of over 30% for the decade.
Or take the aftermath of the 2008 financial crisis, when gold nearly tripled and gold more than quintupled. Or take the performance of gold and silver since 2001, with average annualized gains roughly 50% greater than stock markets since that time.
Don’t leave your hard-earned retirement savings at the mercy of the Fed and its monetary policy. Take active steps to protect and defend your wealth. Call the precious metals experts at Goldco today to learn more about how gold and silver can help you do that.