November 22, 2021

The Federal Reserve should begin scaling back some of its extraordinary pandemic stimulus measures soon. It has foreshadowed a sunset on its huge bond buying program, which should help avoid another “taper tantrum,” like in 2013.

Back then, markets were caught off guard and bond yields skyrocketed. But now, investors are likely better prepared for tightening because of the forewarning. So don’t expect another tantrum, even with the exact timing unknown.

Once tapering begins, it will likely last up to nine months, ending near the middle of 2022. Currently, the Fed is buying $120 billion of U.S. Treasury notes and mortgage bonds each month. That spending will decrease gradually until it hits zero.

This all begs the question – when will interest rates rise?

The Fed has a three-part test that essentially asks:

  1. Has the economy achieved maximum employment?
  2. Has core inflation reached its 2% target?
  3. Is core inflation on track to exceed the 2% target?

I don’t believe the Fed will begin considering rate hikes until late 2022 at the earliest. And once it does allow rates to drift higher, it will probably be gradual.

However, the out clause is the economy.

The Fed could always use the economy as a reason not to act.

I mean, why hasn’t the Fed hit the brakes already? Inflation is out of control. After all, Social Security beneficiaries received news of a 5.9% raise recently. My guess is the Fed is waiting for a clearer employment outlook.

But the fact remains, higher rates are never good for the market. And many Americans would probably find higher interest rates a bit of a shocker.

On a less-shocking note, let’s hope we can all have the certainty of a happy holiday season. From our families to yours, have a safe, healthy, and happy Thanksgiving!

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