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A Taste Of Tapering

By Ashraf LaidiForexMay 06, 2021 02:08AM ET
A Taste Of Tapering
By Ashraf Laidi   |  May 06, 2021 02:08AM ET
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by Adam Button

An ill-advised comment from the former Fed chair gave markets a taste of what's coming when US tapering and rate hikes begin. Although Yellen later rectified her comments (see below), it was a preview of the inevitable. The US dollar led the way on the day while the kiwi lagged. The US services ISM carried the same theme to its manufacturing counterpart, showing weaker than expected headline number (62.7 vs 64.1) but higher inflations and bottlenecks. The ADP survey on private sector missed expectations with 742K vs exp 850K from prev 565K. 

EUR/USD Daily Chart
EUR/USD Daily Chart

In a bizarre episode of a former Fed official lacking self-awareness, Janet Yellen said on Tuesday that rates might have to rise to keep the economy from overheating. As current Treasury Secretary and former Fed chair, that comment carried weight and it sent risk trades reeling and the US dollar higher.  

Yellen later clarified her inflation statements, saying "it's not something I'm predicting or recommending...If anyone appreciates the independence of the Federal Reserve, I think that person is me.”

Some of that unwound later in the day. The context of her comments was that spending was going to rise and that higher borrowing costs are a side-effect but her line was poorly delivered, particularly from a Fed chair who was cautious with her words. 

The market reaction was telling as the dollar spiked to session highs and equities – particularly tech – were at one point in line for their worst day of 2021.

Powell no doubt understands that he's about to enter a minefield. The odds-on date for a true tip towards a taper is Jackson Hole in August. However we should expect a trickle of Fed Presidents and perhaps a governor signaling that before it comes. What's daunting is that signaling a taper is just the first step; the time lag before execution is vital. Then the challenge will be on rate hikes.

Of course, the Fed has sketched out a rough plan via the dot plot and its communication but rarely in economic history have plans worked out. Things happen and forecasting is hard. The Bloomberg commodity index hit its highest since 2011 on Tuesday and inflation talk is non-stop. Expect many more hiccups like the one we saw Tuesday in the months ahead, and some that are much more severe.

A Taste Of Tapering

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A Taste Of Tapering

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