The US Federal Reserve (Fed) officially tapered—slowed—its quantitative easing (QE) bond purchases Wednesday, and far from triggering the tantrum many financial commentators we follow warned of earlier this summer, it ended up being a giant snooze. Instead of being rocked by the news, the S&P 500 flipped from slightly negative on the day before the announcement to close up 0.7%.[i] The 10-year US Treasury yield rose all of 4 basis points (0.04 percentage point) on the day, from 1.55% to 1.59%.[ii] Most commentary we read on the move seemed laced with sleep aid, with the notion of what many commentators have long called a “taper tantrum”—prevalent mere months ago—largely disappearing down George Orwell’s famous memory hole. About all we saw in terms of negative sentiment were questions about when the Fed would raise short-term interest rates and whether doing so would choke growth. We think this reiterates a timeless lesson: Markets pre-price widely expected events, including monetary policy decisions, which our research shows don’t have a preset market impact.
We don’t often give monetary policymakers kudos, but we would like to start by presenting Fed head Jerome Powell and friends the (ironically named) Mark Carney Award for Acting in Accordance with Forward Guidance, rather than saying A but doing B at the last minute.[iii] The minutes from the Fed’s July meeting revealed monetary policymakers “judged that it could be appropriate to start reducing the pace of asset purchases this year.”[iv] In his late-August (virtual) address at the (virtual) Jackson Hole, Wyoming gathering of global monetary policymakers, Powell reiterated that stance and said he thought inflation had made enough “substantial further progress” toward the Fed’s long-run 2% year-over-year target to warrant tapering. Minutes from September’s meeting teed up this month as Taper Decision Day and outlined a potential path for “monthly reductions in the pace of asset purchases, by $10 billion in the case of Treasury securities and $5 billion in the case of agency mortgage-backed securities (MBS).”[v] That is precisely what the Fed announced yesterday, with the reduction beginning this month. The policy statement left some wiggle room to change course in the future if economic data veer unexpectedly,[vi] but otherwise, QE is set to conclude in June.
And that was that! No fireworks. No big market swings. The tantrum many commentators we follow wrote about over the summer just hasn’t happened. The S&P 500 is now up 5.1% since those July meeting minutes were released in mid-August.[vii] 10-year Treasury yields are up 33 basis points.[viii] That is even smaller than its move from May to December 2013, the period when the Fed was publicly discussing tapering its post-financial-crisis quantitative easing programme.[ix] In our view, this echoes the general non-reactions to this year’s other big monetary policy developments. Moves by the Bank of England (BoE), European Central Bank, Bank of Canada and Reserve Bank of Australia to inch back from policies targeting lower long-term interest rates all came and went without much fuss.[x]
We think this speaks volumes about how markets work. When US stocks briefly fell and US Treasury yields rose after former US Fed head Ben Bernanke first alluded to tapering asset purchases in May 2013, it sparked reams of commentary about the alleged taper tantrum.[xi] Whilst these moves were quite small, in our view—and US stocks rebounded quickly—many commentators today still portray it as a large event. In our view, that continued discussion and portrayal set expectations globally for a tantrum this time around. But our research shows markets have a long history of pre-pricing popular expectations, then doing something different. You might say all those taper tantrum fears were self-tapering, if you were inclined to wordplay.
If we had our druthers, financial commentators would learn this lesson and stop warning the Fed’s every move toward supposed monetary tightening would have negative ramifications for markets. (Note that we think ending QE is the opposite of tightening. More on that here.) But given commentators’ shifting focus to rate hikes, we rather doubt it. On the bright side, the heightened focus on a policy lever the Fed has signalled it won’t pull for several months at least means it, too, will likely be fresh out of surprise power whenever the time comes.
In our view, this whole obsession with monetary policymaking is misguided. Monetary policy is but one variable affecting the economy, which is far too complex for the Fed to control by tweaking one rate here and another rate there. Like economies throughout the developed world, the US economy is too messy and decentralised, which we think is a good thing—albeit a factor in recent supply chain disruptions. Moreover, our research shows no set level or direction for interest rates is inherently good or bad for the economy or stocks. The impact of any policy depends on prevailing conditions at the time, and we think decisions must therefore be evaluated as they happen.
We suggest looking at the bigger picture. The US and other major economies are still growing despite the supply chain headaches and other headwinds, and monetary policymakers don’t appear to have done anything to make that less likely over the foreseeable future.[xii] With sentiment still hung up on the mere possibility that these institutions could eventually upset the applecart, expectations appear to remain in check, likely leaving plenty of room for stocks to rise up the proverbial wall of worry.
[i] Source: FactSet, as of 3/11/2021. S&P 500 price return in USD at market close, 3/11/2021. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[ii] Source: FactSet, as of 3/11/2021.
[iii] Carney, you might remember, famously set 7% unemployment as the Bank of England’s (BoE’s) threshold for raising rates in 2013, then did a U-turn when unemployment hit that level much sooner than expected. All the seemingly mixed messaging led one Member of Parliament to liken him to an “unreliable boyfriend,” during a Parliamentary hearing, a tagline commentators repeated often as the BoE continued emitting mixed signals for years.
[iv] “Minutes of the Federal Open Market Committee, July 27-28, 2021,” Federal Reserve, 18/8/2021.
[v] “Minutes of the Federal Open Market Committee, September 21-22, 2021,” Federal Reserve, 13/10/2021.
[vi] A way of heading off one of policymakers’ long-running stated concerns: That folks somehow get the notion that monetary policy decisions are “on autopilot,” to borrow some of the Fed’s old phrasing.
[vii] See Note i. S&P 500 total return in USD, 17/8/2021 – 3/11/2021. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[viii] Ibid. 10-year US Treasury yield, 17/8/2021 – 3/11/2021.
[ix] Ibid. Statement based on 10-year US Treasury yield, 2/5/2013 – 31/12/2013.
[x] Ibid. Statement based on MSCI World, MSCI UK, MSCI Economic and Monetary Union, MSCI Canada and MSCI Australia index returns with net dividends, 31/12/2020 – 3/11/2021.
[xi] Ibid. Statement based on 10-year US Treasury yields and S&P 500 Index returns in 2013. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[xii] Ibid. Statement refers to industrial production, retail sales and gross domestic product for the US, UK and eurozone nations. Gross domestic product is a government-produced measures of economic output.
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