Markets are paying attention to the Federal Reserve nearing agreement to reduce the size of its asset-purchase program before the end of the year.
The Fed’s July minutes showed that many members are in favor of tapering this year, sooner than what investors were thinking. Currently, the Fed is buying $120 billion of bonds, mostly long-dated Treasury bonds each month. But tapering may have already begun.
According to Bloomberg, the growth of the Fed’s balance sheet peaked at 80% year over year when the Central Bank began its asset-purchase program at the height of the pandemic in 2020. Meanwhile, the growth of the money supply and the current amount of cash in circulation in checking accounts, savings accounts, and money-market funds, has slowed.
Earlier this month, Dallas Fed President Rob Kaplan said the Fed should announce its intention to taper the bond purchases in September and start the slowdown in October.
In an interview with Fox Business Network last Friday, Kaplan said he may rethink his call for the Fed to quickly start tapering if it looks like the spread of the coronavirus delta variant is slowing economic growth. “The thing that I am going to be watching very carefully over the next month, before the next (Fed) meeting, is (whether) it is having a more material impact on slowing demand and slowing GDP growth,” he said.
What is interesting from a behavior standpoint is that although the Fed is actively thinking about the timing of tapering its bond purchases, this has had the unique impact of lowering both equity prices and bond yields. Investors are uncertain about the future economic outlook, and prone to fearing the worst, especially if there are concerns that open-ended monetary policies will not continue. At the same time, these are emergency measures intended for, well, emergencies.
Nevertheless, the recent rise in new coronavirus cases and hospitalizations have had a negative impact on U.S. consumer expectations; holding back spending and risk-taking, and even forcing some businesses to postpone their return-to-office plan. The coronavirus cases are not threatening to meaningfully slow the expansion yet, and they are unlikely to unless widespread lockdowns are triggered. Pacing the economic recovery over several quarters may ultimately lead to better investment opportunities over the long term, rather than having a one-time base effect bounce of unsustainably rapid growth in 2021 alone.
If you have any questions or want to have a conversation about the market or your portfolio, please contact Liz, Ed, Fred, Scott, Tyler, or myself. Your Sendero team is ready to help.
Amaury de Barros Conti
Partner | Vice President Investments