Quarterly Update

Paul Single, Managing Director, Senior Economist, Senior Portfolio Manager | Oct. 2021

A Taper Without a Tantrum

The Fed is reducing stimulus, not tightening

The Fed has prepared the markets for this tapering move

The Fed will remain accommodative until their maximum employment goal is reached

In early November, the Fed is expected to announce the planned reduction of future bond purchases. This move simply reduces the amount of stimulus the Fed provides the economy; it is not a tightening of monetary policy. Since May of 2020, the Fed has been buying $120 billion in bonds each month to help drive down intermediate- and longer-term interest rates and provide liquidity to the markets.

The Fed has taken baby steps in preparing the market for the eventual end of these asset purchases. Since December of last year, the Fed has been talking about the conditions needed for the taper. This past April, the Fed indicated that the FOMC would begin discussions about tapering, and they spoke about it during their summer meetings. In September, they announced plans to make a formal announcement at their Nov. 2-3 meeting and commence shortly afterward. The bond-buying is expected to end by mid-2022.

The Fed is trying to avoid the “taper tantrum” that occurred the last time they announced a reduction in their bond-buying program. Many at the Fed believe poor communication caused the famed 2013 taper tantrum, and they did not want it repeated. Back then, a reactionary panic forced 10-year yields to increase about 100 bps, and caused financial conditions worldwide to tighten. That triggered a significant economic decline in the U.S., a second European debt crisis and credit problems in the emerging markets. At the end of that tantrum, it was realized that the panic was unjustified and the Treasury market recovered, with 10-year yields dropping 70 bps during the 10 months of tapering.

With the combination of the large balance sheet and the low level of federal funds, the Fed still provides a very high level of stimulus to the economy. Moreover, they have made it abundantly clear to the markets their plans to stay accommodative until they reach their dual goals of inflation above 2.0% for a sustained period (they have probably reached this goal) and maximum employment (they have not reached this goal).

Key Points

The Fed is reducing stimulus, not tightening

The Fed has prepared the markets for this tapering move

The Fed will remain accommodative until their maximum employment goal is reached

Stay Informed.

Get our Insight delivered straight to your inbox.

Important Disclosures

Important Information

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation.

Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Funds’ investment objectives, risks, fees, and other expenses.

Investments in below-investment-grade debt securities which are usually called “high-yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high-yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying, and lengthy lockup provisions.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.