A Taperless Taper Tantrum?

Chief Economist Scott Brown discusses current economic conditions.

Long-term interest rates have continued to rise. While part of the increase has been fed by inflation fears, those concerns are overdone. Yet, long-term interest rates should rise as the economy recovers and it’s reasonable to expect that rates will eventually return to pre-pandemic levels. At the same time, increased government borrowing and the Fed’s ongoing purchases of long-term Treasuries and mortgage-backed securities will push in different directions.

In 2013, the Fed was in the third round of its Large-Scale Asset Purchase (LSAP) program, more commonly known as QE3. In congressional testimony that May, Fed Chair Bernanke hinted that the pace of monthly asset purchases would be reduced (“tapered”) at some point. Bond yields snapped higher. The stock market sold off a month later when Bernanke signaled that tapering would happen by the end of the year.

In his monetary policy testimony, Fed Chair Powell indicated that the Fed has no intention of altering the monthly pace of asset purchases (currently $120 billion per month). The Fed’s focus is on the job market and Powell said that the Fed is still a long way from achieving its inflation and employment goals. Other Fed officials echoed this view.

Scott Brown
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Inflation expectations have picked up, but not by a lot. Breakeven inflation rates (the yield difference between inflation-adjusted and fixed-rate Treasuries), while not exactly inflation expectations (although close enough) are moderately higher over the next five years, but have held close to 2% for the five years after that. That’s consistent with the Fed’s revised monetary policy framework, which calls for a period of inflation moderately above 2% (following a period of inflation below 2%), maintaining a long-term goal of 2%.