The Federal Reserve may dust off its playbook from 2013 if it shifts to tapering its aggressive asset purchase program.
Currently, the central bank is snatching up $80 billion in U.S. Treasury bonds and $40 billion in agency mortgage-backed securities per month.
The Fed’s latest guidance, from Dec. 16, noted that the so-called quantitative easing program would continue at least at that pace until the economy looks like it has made “substantial further progress” in the recovery.
But minutes from that December meeting note that a “number” of Fed officials are already thinking about how to wind down those purchases once that “progress” is made.
Those unnamed Fed officials said they would like to “follow a sequence similar to the one implemented during the large-scale purchase program in 2013 and 2014.”
At the time, then-Fed Chairman Ben Bernanke announced in December 2013 that it would be notching down its monthly pace of purchases from $85 billion per month to $75 billion per month. The Federal Open Market Committee (FOMC) clarified that the program was not on a “preset course,” and that further slowing those purchases would only happen if the economy was ready for it.
JPMorgan’s Michael Feroli noted that the FOMC minutes for December 2020 show that the Jerome Powell-led Fed would similarly like to have its purchases “set on cruise control.” Feroli wrote Wednesday that the 2013 and 2014 reference also means the tapering process could go on for about 10 months. Analysts at Evercore ISI project a 12-month taper.
“Guidance on asset purchases remains pretty vague at this point and it appears future decisions will remain discretionary,” Feroli said in a note.
A cautionary tale
But the 2013 experience is also a cautionary tale of the perils of Fed communication.
The Fed had been debating its approach to tapering for months leading up to the December announcement, and Bernanke in May 2013 let it slip that a “step down” in quantitative easing could happen. The remark triggered a spike in bond yields and falling stock prices in an episode now known as the “taper tantrum.”
“A taper tantrum is now a real risk,” Jefferies economist Aneta Markowska told Yahoo Finance on Wednesday, forecasting a U.S. 10-year Treasury bond reaching 2% by the end of 2021.
The 10-year broke through the 1% mark on Wednesday morning, on the heels of the Georgia runoff election results that resulted in Democratic control of the Senate.
For the Fed’s part, policymakers are not yet on the same page about the timing for when to kick off any tapering. The minutes noted that two Fed policymakers favored a more stimulative quantitative easing program that would tilt its purchases toward longer-dated bonds.
In remarks this week, Fed officials sent mixed messages on whether or not the next steps on asset purchases would be a ramping up or a winding down of the program.
“These comments created an unhelpful mini-cacophony that is more than usually problematic given subsequent political and fiscal developments,” Evercore’s Krishna Guha and Ernie Tedeschi wrote Wednesday.
The analysts advocated for Fed leadership to more clearly signal its intention on where quantitative easing is headed, marking now as a “sensitive moment” for the Fed.
The next scheduled policy-setting meeting will be Jan. 26 and 27.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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