Tuesday's Market Minute: Is A Taper Tantrum Around The Corner?

The biggest fear for many stock investors is the inevitable taper tantrum. The markets may have been jolted to start this week after receiving some clarity from St. Louis Fed President Bullard. Bullard stated that a 75% vaccination rate could be a key threshold that allows for the tapering debate to begin. Currently, the CDC reports that 22.3% in the US are fully vaccinated, while 36.4% have at least one dose.

US stocks could struggle in the short-term, if inflationary pressures grow and if financial markets become fixated with the taper debate. The Fed has clearly signaled they are not worried about inflation, but ironically, that statement tends to worry financial markets. The Fed continues to be highly active in 2021, with expanded purchases of U.S. Treasury securities to cushion the pandemic impact on the markets and facilitate the finance of massive Treasury issuance for fiscal easement. Commitment to continue purchasing Treasuries and mortgage-backed securities at a rate of about $25-$30 billion per week, means that the balance sheet will continue to grow in 2021. As of April 7, the Fed’s assets stand at $7.7 trillion, a nearly 10-fold increase from $800 billion in 2008 and on pace to breech the $8 trillion mark on a net purchase basis by mid-year.

While the Fed has not explicitly stated that it has a yield-curve control policy, the current balance sheet expansion policy could maintain a floating lid on long-term rates. Alongside labor market slack, I expect robust quarterly and annual corporate profits, since stagnant wage growth had yet to manifest into higher costs of production. At the very least, QE is on cruise control until inflation is at 2% or greater for at least a year and when the labor market returns to full employment. However, if Treasury yields surge again too quickly and equities flounder, the Fed could be forced to act starting with altering their purchases. They may increase the weighting to more Treasuries and less mortgage-backed securities, but maintain the total monthly volume of purchases nonetheless.

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