NN IP: Will the taper cause another tantrum?

NN IP: Will the taper cause another tantrum?

18 augustus 2021

Monetair beleid
Obligaties (02)

It’s only a matter of time before the Fed starts tapering its USD 120 billion per month net asset purchase program. The hawks would probably like to announce a taper as soon as September, while the doves would like to wait a bit longer. This difference of opinion should only shift the taper announcement by a few months.

The much more interesting point to consider, according to Willem Verhagen, Senior Economist, Multi-Asset at NN Investment Partners(NN IP) in his latest macro column, is the announcement’s effect on the US Treasury market.

"The difficulty is that the market does not have a stable anchor for the "inputs" – the future evolution of the economy – of the Fed’s reaction function. This is because there is a wide range of possible outcomes between the tail risks of inflation on one hand and the tail risk of a return to secular stagnation on the other. In such uncertain times, a strong commitment to the dovish reaction function at least gives the market a solid anchor for its future rate expectations. Of course, to the extent that this commitment starts to be doubted, the result can only be increased volatility and policy uncertainty, which will be expressed in the form of a higher term premium."

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