There's been noise that the Federal Reserve may suddenly start tightening policy or move towards raising interest rates.So everyone calm down.This is an opinion column. The thoughts expressed are those of the author.With the US economy poised to come out of the COVID hit in a strong position, the economic worriers are exhuming an old boogeyman to pin their doom and gloom on: the Federal Reserve.
At the first sign of economic improvement, bond markets would assume the Fed was ready to move against potential inflation with decreased bond purchases and higher rates. As the Fed pushed back on the idea of less economic support, markets eventually caught on. For investors, this dynamic creates trading opportunities in the front end of the yield curve. Markets shoot first and ask questions later. The Fed tends to ask questions first.
2013's "taper-tantrum" — the investor freak out over whether the Fed was going to decrease the amount of bonds it was buying and potentially raise interest rates — was sparked by comments from then-Chairman Ben Bernanke – straight from the horse's mouth. Today, the "taper-talk" so far has been fueled by a number of
At the time, most investors assumed that the Fed's bond buying and interest rate hikes were closely linked. Thus, when Bernanke suggested slowing bond purchases in May 2013, the fixed income markets assumed an increase in policy rates was just around the corner. The two-year yield started shooting up, as an example.