Fed Announces Announcing Taper – What Next?

Last night saw the latest US Fed meeting and (finally) ‘confirmation’ of what they have been jawboning for a while and that is tapering of QE to ‘likely’ start next month.  Maybe because of all the lead up references the market did not, at this point, chuck a so called ‘taper tantrum’ as has occurred on previous attempts.

The announcement saw shares rally 1%, a sharp tightening of the yield curve in US Treasuries and gold only slightly down.  In Aussie dollar terms silver and platinum actually rallied strongly higher as the stronger USD forced the AUD down.

So what were the key takeaways?

Tapering – while not committing Powell firmly hinted that they will announce tapering in November, commence in December and finish mid 2022.  The caveat was on unexpected employment data or other data shocks.  Whilst unsaid, it may depend also on how the sharemarket reacts after properly digesting the news.  Last night may well have been a sell the rumour buy the news event and the realisation of what this means may sink in and the market recommence its recent downward trajectory.  That would certainly test their resolve next month…

Interest rates – There was a slight adjustment toward earlier commencement of raising rates.  The split between the committee members is now even on whether the first 0.25% hike would be in 2022 and 2023.  And herein lies the real crux of all this and also what the Fed is at pains to stress.  Tapering is not tightening!  Stress that as they might, in previous attempts we have seen the so called taper tantrum when the market panics that the artificial support is removed and crashes.  That didn’t happen last night but it didn’t happen straight away in 2018 either…  What is clear and what they are expressly saying is (ex Powell) “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff,”

In other words please don’t panic as we aren’t raising rates until, at worst late 2022, and even then only 0.25% at a time.  For the first time too we saw their projections into 2024 and it is worth noting.  The median projection amongst the committee for the end of 2024 was just 1.8%.  The median for 2023 rose to 1% from 0.6%. 

Those of you aware of gold’s correlation with negative real interest rates are probably right now doing that math…  Their target rate less inflation is still, and will be for some considerable time, negative.  That is very supportive of higher gold prices, irrespective of safe haven trading in a tantrum.  Looking at the driver of rates and the outlook for inflation, Bloomberg note:

“The U.S. unemployment rate fell to 5.2% in August, well below the April 2020 peak of 14.8%. But it’s still above the 3.5% rate that prevailed in February 2020, just before the pandemic struck. Fed officials have said they expect to keep the funds rate near zero “until labor-market conditions have reached levels consistent with the committee’s assessments of maximum employment.”

Inflation, according to the Fed’s preferred measure, was 4.2% in the 12 months through July, well above the central bank’s 2% target. Many Fed officials have said they expect it to return to around 2% after temporary supply-chain disruptions resulting from the pandemic have been resolved, though several have also cited the rapid price increases as a reason to begin raising rates as early as next year.”

Last night’s rally in the face of taper “confirmation” may have been on the back of the Fed’s GDP projections for 2022 being stronger at 3.8% (and 2.5% for 2023). The Fed have a simply awful track record of over estimating GDP but no one is acknowledging that.

So we watch for ‘where to from here’ as the market digests what are still words not actions but words pretty hard to retreat from now nonetheless.  He all but said it WILL be November.  What is abundantly clear is that whilst QE may be tapered, they are (in his words) “well away from satisfying the liftoff test”, and zero interest rates are here for some considerable time when inflation is already looking a lot more sticky than their ‘transitory’ narrative.  That, dear reader, puts us firmly and indeed historically extended into negative real rates territory. That is music to gold’s ears.

And of course what no one in the press today is talking about is their inability to EVER raise rates in any meaningful way to curb inflation whilst the world sits on an historically unprecedented pile of debt, over 350% of GDP.  They may be able to taper (for now) but they simply cannot normalise.  Stay tuned for the next QE.