Taper Tantrum 2.0 any day now

For the first time since the pandemic began in March 2020, initial jobless claims have fallen below 500,000 as of last week, according to the Labor Department. It’s a big deal. Companies are now loudly proclaiming that they are having trouble finding workers. Job openings are skyrocketing across all sorts of different industries.

Yesterday I went on TV and suggested that perhaps it’s unnecessary for the Federal Reserve to be buying $40 billion worth of mortgage bonds on top of $80 billion worth of Treasury bonds EVERY MONTH. Full employment depends upon vaccination rates and reopening cities. The Fed can perhaps hurt the situation by getting too tight, too soon, but it cannot really help much from here. The financial markets are fine, amply liquid and functioning smoothly. The housing market doesn’t require anymore extraordinary stimulus, it is plenty stimulated already. Central banks in Europe are starting to openly discuss tapering of financial asset purchases.

I think the Federal Reserve is going to start squeaking about its own taper sometime this summer. The initial reaction is going to be a kneejerk panic in the stock market, because it’s a market of people and people take a moment when new information arises and expectations have to adjust.

On May 22nd, 2013, then Fed Chair Ben Bernanke appeared before Congress and said “If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings … take a step down in our pace of purchases.” People flipped the f*** out. They had grown accustomed to the Fed purchasing every bond they could get their hands on for years and years on end and then all of a sudden we had to contemplate a post-crisis environment in which things would be different. Not better, not worse, just different. We don’t like uncertainty. We don’t appreciate change, especially when it arrives suddenly. Stocks crashed and bond yields rose.

Bernanke appeared before Congress in July and clarified – Guys, we’re not literally going to raise rates, don’t worry. We’re just going to slow down the asset purchases. Chill. I’m paraphrasing.

It wasn’t until December of that year, seven months from the initial telegraphing, that the Fed would indeed announce a tapering of asset purchases. They said they would go from $85 billion a month to $75 billion. The following month the Fed purchased just $65 billion worth of bonds, and then $55 billion the next month. And so it went as Bernanke stepped down and Janet Yellen replaced him on the Iron Throne.

And then, on December 15th 2014, after a full years of tapering asset purchases and stroking the market’s back in speech after speech as though it were a frightened, anxious child, the Fed hiked interest rates by a quarter of a point. It was the first Fed rate hike since 2006! It took a lot of finessing by all of the various Fedheads over the course of the previous twelve months to get everyone ready for it. And then they moved. They didn’t stop moving. Rates rose for the next four years into December of 2018. They reached 2.5% and then the destructive economics of the Trump trade war finally made the market cry uncle. The Fed eased in 2019 and then went back to zero when the apocalypse came along in 2020.

I took you on this walk down memory lane to remind you that during all but one of those years (2018 being the lone exception), stock prices went up. Stimulus, tapering of stimulus, rate hikes, rate cuts, speeches, policy changes – we had corrections and panics and crashes but the secular bull market that had begun in the spring of 2013 continued. And when we have Taper Tantrum 2.0 this summer or fall (it’s coming, I promise you), I want you remember this.

Oh, one other thing – Jerome Powell’s first full year on the Fed’s Board of Governor’s? You guessed it: 2013. He literally had a front row seat for the first Tantrum. I would imagine he learned a thing or two.

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