With markets on edge, this is certainly no time for another “taper tantrum” upon which stocks tumble on the news that pandemic stimulus may come to an end. Nevertheless, the U.S. central bank has officially revealed plans to slow down its purchase of bonds and begin raising interest rates as early as next year.
Despite worries over a spreading property meltdown in China, rising delta cases, debt ceiling trouble in Washington and worldwide concern over the impact of higher rates on borrowing, U.S. Federal Reserve chair Jerome Powell said Sept. 22 that he is confident it is finally time.
There will be two stages to the rollback which will gradually make money harder to borrow. The first could come as soon as November, when the Fed tapers off on its weekly purchase of billions of dollars in bonds. That process could be complete by mid-2022.
Yet as we have seen again and again recently, nothing can be guaranteed.
Traditionally, announcements that the Fed was planning to cut monetary stimulus has resulted in a wave of stock-market selling, dubbed a taper tantrum, as traders adjust to the idea that an era of bargain borrowing is coming to an end.
Ending that process, called quantitative easing, not only makes mortgage debt more expensive, but is part of a chain of events that will lead to higher interest rates across the board. Because of the impact of U.S. bond markets on Canadian rates, that will also affect borrowers north of the border.
“The test for beginning our taper is that we’ve achieved substantial further progress toward our goal of inflation and maximum employment,” Powell told reporters at last week’s virtual news conference.
“Many on the committee feel that the substantial further progress test for employment has been met,” he said, although progress on jobs had been slowed because “delta happened.”
More than half of that committee foresees the actual bank interest rates beginning to rise by next year, coming closer to estimates of private sector economists who have already anticipated a half-point hike in 2022.
Powell said there was no sign that the China property crisis, specifically the threatened default of Evergrande that has led to tightening of credit throughout China’s enormous home-building sector, would have a direct effect on U.S. corporate defaults that he saw as continuing to be “very low.”
The other thing that could threaten U.S. economic stability as the year closes is another battle in Congress over raising the debt ceiling limit.
“It’s just very important that the debt ceiling be raised in a timely fashion so that the United States can pay its bills,” said Powell. “The failure to do that could result in severe reactions, severe damage to the economy and the financial system.”
Many expected Powell would delay on the decisión to change monetary policy. Last week, the OECD, the rich countries’ economic think tank, urged governments and central banks around the globe to resist cutting stimulus. As such, Powell is taking no chances.
With things like Evergrande, the debt ceiling and the uncertainty of the delta variant, and even the potential effect of a new taper tantrum, Powell said the final decision will actually come in November, the next time he’s scheduled to hold a news conference.
“We could easily move ahead at the next meeting,” said Powell, sounding confident, before quickly adding, “Or not.”
