Minutes Show Tapering Unlikely, Eyes on Powell Next Week
Minutes Show Tapering Unlikely, Eyes on Powell Next Week
Can you feel it? The fear of a taper tantrum is in the air. Long-term yields are steepening and the annual testimony of Federal Reserve Chairman Jay Powell on monetary policy next week may be contributing to why markets were on edge. A sell-off in US bonds likely contributed to choppy markets this week.
Fed Minutes from the last policy meeting were released this week and showed some lively debate amongst governors but the headline is the same; the Fed is very serious about letting inflation move above 2% to achieve maximum employment and its board members are confirming that they will view initial reflationary forces as acceptable and likely not the beginning of a significant trend. This is important since markets appeared to be partially down this week on rising rates and the fear of a ‘taper tantrum’. Powell continues to beat the steady drum of assuaging investors and that’s unlikely to change anytime soon.
The weather events in Texas this week prompted rumblings amongst the board’s more progressive leaning members of the risks to the financial system posed by climate change. We noted this would be a major battle line between parties this year, and the current cold weather appears to have heated the argument up. On Thursday, Federal Reserve governor Lael Brained spoke about the Central Bank’s efforts to ensure the financial system can deal with the risks presented by climate change. “Climate change is already imposing substantial economic costs and is projected to have a profound effect on the economy at home an abroad,” said Brainerd.
Just how the Fed plans to deal with these risks, and mandates their banks to account for them through their supervisory function will be a major flashpoint as time goes on. Republicans have already voiced concerns of the Fed relegating industries to financial exile by including climate scenarios in the annual stress test. The scenarios for 2021 did not contain assessments of climate risk. Brainerd advocated for it in the future though.
While the headlines around the Fed and cryptocurrency have been largely positive as of late, we did notice some comments from the Federal Reserve President from Boston, Eric Rosengren. Rosengren said he was personally surprised at the continued prominence and appreciation of Bitcoin. The topic has been at the forefront since major companies like Tesla and the Bank of New York Mellon made moves to embrace the most prominent cryptocurrency. Last week, the market cap of Bitcoin surpassed $1 trillion.
Mr. Rosengren did bring up an interesting point. He thinks that Central Banks will come to dominate cryptocurrency as they launch CBDCs. We think this is likely not the case and the non-aligned and democratic structure of Bitcoin will likely lead to its continued endurance and price appreciation.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.34% up from 1.21% last week.
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