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“Dovish Tapering” Announcement Keeps Yields from Spiking (For Now)

Today’s Fed meeting announcement and subsequent presser by Fed Chair Powell confirmed that the tapering of monthly bond purchases has begun. The muted market reaction is a testament to how unsurprising the well telegraphed announcement was to investors (Dow and S&P up slightly, 10 year T yield jumped 6 bps to 1.60%). Pick your metaphor: “the punch bowl is not being taken away, it’s just less full”, “the Fed didn’t put the brakes on, it just eased off the accelerator”. Highly accommodative monetary policy is still in place: Fed Funds rate is at zero, billions of dollars of MBS and Treasuries are being purchased every month, the Fed’s balance sheet is at nearly $9T of bonds that they have no intention of selling anytime for years.

What is changing? Powell no longer refers to inflation as purely “transitory” and that supply/demand imbalances are persistent. Everyone is looking for clues on when rate increases will occur. Note that Bank of Canada, Bank of England, Bank of Australia are all aggressively raising rates to combat inflation. Powell pointedly remarked that, “Our tools cannot ease supply constraints” and that “the dynamic economy will adjust to imbalances and inflation will decline to levels much closer to our 2.0% longer run goal”. This is being interpreted as highly dovish and the Fed may not need to aggressively raise rates. The risk is waiting too long to raise rates (while other major banks increase) which could lead to runaway inflation and multiple rate increases in a short period. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners