© Reuters. FILE PHOTO: The U.S. Federal Reserve Building is pictured in Washington, March 18, 2008. REUTERS/Jason Reed
By Jamie McGeever
ORLANDO, Fla. (Reuters) – The curious dance between markets and the Federal Reserve is underway – Wall Street on a roll even as Fed officials say the most aggressive interest rate hike cycle in decades decades might have to go further – can in part be attributed to the “taper tantrum” communications debacle exactly 10 years ago.
On May 22, 2013, Fed Chairman Ben Bernanke revealed for the first time that the central bank may soon begin to scale back its asset purchase program, triggering a wave of panic, volatility and uncertainty. that has hit world markets.
As much as asset prices have come under fire, the more the Fed’s credibility has been damaged. Fear of a repeat influenced subsequent policy signals and ultimately helped shape the Fed’s eventual move to a double rate hike, ending so-called quantitative easing (QE) and beginning tightening. quantitative (QT).
The Fed was much more meticulous after 2013 in laying out its various stimulus withdrawal measures. Markets were much better prepared when the time came in 2022 for the Fed to simultaneously hike rates and shrink its balance sheet.
But as some argue, in its quest to avert another slump, the Fed delayed this two-pronged tightening too long, which in part contributed to the stickiness of inflation today.
Paul McCulley, adjunct professor at Georgetown University and former chief economist at fixed income giant Pimco, notes that communications groundwork for the rate and QT hikes began in September 2020. The first rate hike took place in March 2022 and QT started three months later.
This long build-up may have averted another convulsive fit, but tied the Fed’s hands on raising rates even as inflation returned to the upside.
“The ‘cure’ to what happened a decade ago – the market skipping take-off – has itself become a problem this cycle: a forward-looking straight jacket that delayed take-off if necessary policy rates,” said McCulley.
COMMUNICATION FAILURE
Responding to a lawmaker’s question during an appearance before the Joint Economic Committee of Congress on May 22, 2013, Bernanke said, “If we see continued improvement and we are confident that it will continue, we could in the upcoming meetings…take a step forward in our buying pace.”
Markets believed that meant not only that the Fed would soon “cut back” on its bond purchases, but also that it would raise interest rates. They went into a frenzy.
Within weeks, stocks fell 8%, global stocks fell 10%, currencies and emerging market stocks fell 5% and 15%, respectively, and stocks soared 2% to 3 %.
Emerging markets were particularly hard hit, due to their exposure to dollar-denominated debt and US borrowing costs. They were also at the forefront of the Fed’s current tightening campaign of 10 consecutive rate hikes worth 500 basis points and the launch of “quantitative tightening” or QT.
US markets, however, were less shaken. The S&P 500 is now only 5% lower than it was in March of last year when the bulls started and it’s up nearly 10% this year. So far this year, the Nasdaq is up more than 20% and Treasury yields are lower.
Willem Buiter, a former policymaker at the Bank of England, said markets took rate hikes and QT in their stride because policy changes were well signaled. The Fed and the markets learned the lessons of the taper tantrum.
“The markets have learned the conditions under which QT and multiple rate hikes will take place and will continue. And the Fed has improved its communications from what we saw 10 years ago, which was a bit of a goal staff,” Buiter said.
Bernanke and his peers can be released. May 2013 has been a fragile time – less than five years since the collapse of Lehman Brothers, and less than a year since European Central Bank chief Mario Draghi saved the euro with his “everything that need”.
Deflation, not inflation, was the fear.
As other central bankers have discovered, exiting the zero interest rate policy (ZIRP) and QE regime was much more complicated than entering it.
Former Bank of England Governor Mark Carney sadly said that once unemployment in the UK drops below 7% interest rates will rise – they do, they won’t. didn’t – earning him the nickname “unreliable boyfriend”.
Andrew Sentence, a former BoE rate setter and one of the most consistently hawkish policymakers of recent times, says the conical crisis was just one example of the many miscommunications at the time. from central banks trying to unwind stimulus.
“If you want to signal a policy change, it needs to be planned and part of a cohesive central bank communication strategy. Perhaps the taper tantrum illustrates that it wasn’t as planned and cohesive it should have been,” he said. .
(The views expressed here are those of the author, columnist for Reuters.)
(By Jamie McGeever)