Last week’s jitters in financial markets after the release of the US Federal Reserve Board minutes of its July meeting provide a volatile backdrop to this week’s annual Jackson Hole conference of the world’s central bankers.
As last week’s shudders in the markets showed, even a hint that the moment when tapering begins is looming has implications for financial assets whose values have been inflated by the torrents of monetary and fiscal stimulus that have flooded financial systems and economies over the past 18 months.
During the “taper tantrum” in 2013 bond yields as bond prices crashed and equity markets slumped more than four per cent in three days after then-chairman Ben Bernanke raised the prospect of tapering the QE program. The Fed backed off, continuing its purchases until late 2014.
The persistence of the supply chain disruptions and the Biden administration’s planned dramatic increase in government spending mean, however, that the transition could be a lengthy one and lock in an inflation rate at levels that would eventually force the Fed’s hand. Powell would be acutely aware that any misstep in unveiling and detailing the Fed’s plans could cause chaos in the markets, adding wealth effects and fear to the raft of other threats to US, and global, economic growth and stability.