When The Fed Tapers Bond Buying Then Raises Interest Rates

When The Fed Tapers Bond Buying Then Raises Interest Rates

Even though The Fed is keeping interest rates at zero for now, it may begin tapering its bond buying program sooner than later. I explain what this could mean for markets in my latest YouTube video.

This summer has been more eventful for some than others with Congress recently passing a $1 trillion infrastructure bill, which is sure to add more fiscal stimulus to the economy. Meanwhile, with Jerome Powell and The Fed, their monetary policy is largely unchanged from their recent July 2021 meeting.

FOMC will keep things unchanged and continue with their money printing aka Quantitative Easing (QE) program and keep interest rates at near zero.

What this means for stocks is that the party will continue as major stock market indices like the Dow and S&P 500 have been hitting all time highs. But even as stocks are rising, they’re starting to await clues from the Fed.

I talk about what it might mean if The Fed might start tapering its bond buying program aka QE and if they might start raising interest rates in the coming years. For now, there doesn’t seem to be an immediate cause for concern but we’ll see what might shake out.

With ongoing fiscal and monetary stimulus, the continuing money printing seems to just be adding fuel to the dumpster fire known as inflation.

What this means for value investors is to make sure we’re prepared no matter what happens in the economy and stock market. Even though Warren Buffett says no matter what The Fed is up to, we should be able to find deals — I think he’s also having trouble finding good bargains right now.

I know Buffett’s sitting in over $140 billion cash, this signals to me that I should also have some cash as ready firepower that I can deploy when and if stocks go on sale. So we gotta wait and see.

The worldwide economy seems to be on the mend as more people are dining out more and traveling, so The Fed has maintained its current monetary policy.

Jerome Powell said it would take seeing stronger jobs numbers in the fall to maybe take some new actions.

With interest rates at near zero, this refers to the Federal Funds rate, or the rate at which banks can lend to each other and is often shown in a range. Right now it’s between 0 to 0.25% and will remain unchanged for the foreseeable future.

The Fed wants the economy to continue progressing toward its dual mandate goals of maximum employment and price stability and moderate long term interest rates.

If inflation is really heating up, The Fed might start tapering its $120 billion of bond buying a month, which includes $80b/mo in US Treasury bonds and $40b/mo in mortgage-backed securities.

I share my summary of the New York Times’ summary of The Fed’s late July meeting where they said that The Fed is laying the groundwork for less supportive policy.

So it sounds like sooner than later The Fed is getting ready to tighten the spigot to the easy and cheap money.

The Fed is trying to be cautious so as not to cause another “Taper Tantrum” as what happened in the bond markets in 2013. I explain the historical context behind the bond tapering announcements and actions that happened around 2013-2015.

And now The Fed has assets on its balance sheet to the tune of $8.2 trillion, which is more than double what it got down to (around $4 trillion) before 2020 happened. This is a little scary to me of what this could be foreshadowing.

US economic indicators seem to be on the uptrend, and in 2021 we’re trending toward hitting the Fed’s targets of an unemployment rate of 4.5% and we will blow its 2% inflation target out of the water this year but it will even out in future years.

I created a chart in which I compared The Fed’s June 2021 Projections to those it had in December 2020. Aside from way higher-than-expected PCE inflation projected to occur in 2021, the biggest change is a projected Federal Funds rate increase to 0.6% by 2023.

I interpret this to mean that by either late 2022 or sometime in 2023, we could start seeing the Federal Funds rate reach 0.25% to 0.5% and/or 0.5% to 0.75%.

Various numbers of Federal Open Market Committee (FOMC) members believe we could see rate increases as early as 2022 or at some point in 2023.

Although some of these macroeconomic indicators may not make a big deal in the short term, in the long term they could help inform us of some market movements so we’re hopefully better positioned to buy stocks on sale in the future.

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.

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