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Global Growth May Slide As The Fed Tapers

By Michael KramerMarket OverviewOct 15, 2021 05:29AM ET
www.investing.com/analysis/global-growth-may-slide-as-the-fed-tapers-200605182
Global Growth May Slide As The Fed Tapers
By Michael Kramer   |  Oct 15, 2021 05:29AM ET
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This article was written exclusively for Investing.com.

Bond yields and the dollar have been moving sharply higher of late as the market prepares for the Federal Reserve to wind down its bond-buying program. The anticipation for this change in monetary policy is sending rates on the shorter-dated maturities higher and the dollar along with it. However, the longer-dated maturities have seen their rates collapse in recent days, flattening the yield curve. 

The strong dollar and the flattening curve appear to be sending a warning message. The market seems to be getting concerned that perhaps the shifts in monetary policy will result in slower global growth due to rising short-term rates and the implication of a stronger dollar. It would seem the Fed has given the market too much time to prepare for this policy change. 

The Dollar Is Getting Stronger

The dollar index has moved sharply higher since bottoming on Sept. 3, rising by more than 2% to around $94. The dollar is nearing a potentially big break out, which could send it to as high as $98. To get the index moving higher towards that next level, it needs to clear a resistance level at $94.60. The relative strength index has been steadily trending higher, suggesting there is strong bullish momentum behind the dollar’s move up. 

US Dollar Daily
US Dollar Daily

Yields Are Rising

The 2-year rates have also been pushing higher and are now trading at 35 bps, the highest level since the spring of 2020. The move higher on the 2-year confirms that the bond market sees a Fed tapering event very soon. Additionally, the act of tapering should result in the 2-year climbing to even higher levels, as the Fed begins to reduce its asset purchases. In 2014, the last time the Fed ended its bond purchase program, the 2-year was trading over 50 bps, up from around 20 bps in the spring of 2013. 

2-Year Treasuries Daily
2-Year Treasuries Daily

The 10-Year Has Doubts

However, the 10-year seems to have a different opinion on the matter, as it has seen its yield rise only slightly since the beginning of September and has now turned sharply lower in recent days. Since peaking on Oct. 11 at 1.63%, the yield has dropped back to roughly 1.51%. It seems that the longer-end of the curve may be starting to get worried about what the stronger dollar and the Fed removing accommodation may mean for future global growth rates. 

It would seem that investors are beginning to realize that as the Fed tapers, it will be removing some very easy financial accommodation, which to some degree is not all that different from tightening. These tighter conditions will come while the dollar is growing stronger, which will weigh heavily on global growth. A stronger dollar will bring higher prices to any country that buys commodities priced in dollars, finances its debt, or conducts any primary form of business. The purchasing power of the local currency depreciating leads to slower growth. 

It may turn out that the Fed is waiting so long to begin the tapering process, it has given the market too much time to prepare, resulting in the effects of a Fed taper being put into motion too early. Now, the act of tapering will be coming as the effects are starting to be felt, which may make the equity market very jittery as it sees growth rates slow even more across the entire globe and yield curves flatten due to a stronger dollar and tighter financial conditions. 

Global Growth May Slide As The Fed Tapers
 

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Global Growth May Slide As The Fed Tapers

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Comments (12)
Solomon Lalani
Solomon Oct 17, 2021 11:42AM ET
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You are correct! Those saying tapering is not tightening do not understand that in the end, it is all about money supply.  Tapering or change in interest rates (besides nuclear options such as cash reserve ratio and liquidity reserve ratio) are all monetary policy tools.  So any thing that reduce money supply is tightening.  Market reaction (the direction) and the scale will depend on the market players interpretation of Fed's action
Jesus Iglesias
Jesus Iglesias Oct 16, 2021 2:40AM ET
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Sorry, you're wrong again, M.K.
Jokers R Us
Jokers R Us Oct 15, 2021 3:28PM ET
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Two weeks
Koky Abdo
Koky Abdo Oct 15, 2021 2:12PM ET
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Hello everybody
John Christo
John Christo Oct 15, 2021 2:12PM ET
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hello am new here . and I want to buy bitcoin
James Andrews
James Andrews Oct 15, 2021 12:40PM ET
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They are timing it with the holiday run up so that it doesn't have as much of an effect. Next year, yes, but this first round will be overshadowed by holiday buying.
Pes Wtf
Pes Wtf Oct 15, 2021 11:46AM ET
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your country is doing well and good,look at my country. SGX NIFTY is high on drugs just like BITCOIN
Ali Hossainy
Ali Hossainy Oct 15, 2021 11:11AM ET
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Hi everyone
Trcy Gabriel
Trcy Gabriel Oct 15, 2021 11:11AM ET
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afa
Mehar Ahmad
Mehar Ahmad Oct 15, 2021 11:07AM ET
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how are you
Om Pandey
Om Pandey Oct 15, 2021 11:06AM ET
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when fed is going to meet
Aj Troske
Aj Troske Oct 15, 2021 11:04AM ET
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Great post, the market will fall, and when it does. Ill be waiting and ill get rich
Antonio Velardo
Antonio Velardo Oct 15, 2021 11:02AM ET
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Hi Michael. You keep pushing for a market fall to save your short positions?
Jouni Matero
Jouni Oct 15, 2021 11:02AM ET
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Just like you are all in longs and scared if he's actually right leaving you with heavy bags.
Isaiah Idonor
Isaiah Idonor Oct 15, 2021 7:00AM ET
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hello
 
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