The rapid rise in yields this week has come despite a perfectly competent performance from Fed Chair Jerome Powell in front of the Senate Banking and House Financial Services Committees. He gave his best assurances and it’s seemingly fallen on deaf ears.
I expect we’ll see a lot more of this from central banks in the coming weeks if stock go into freefall. Despite a couple of days of losses, we’re very much not in that territory yet – this is not a taper tantrum – and policy makers may be perfectly comfortable with what’s happening.
We are heading for a super-charged recovery, after all, thanks to the vaccine rollout and all the fiscal support measures over the last 12 months. Not to mention the desperation of people to escape their now beautifully decorated homes.
Investors should not need the central bank to hold their hand much longer and I expect by the end of the year, taper discussions will and should be starting. Of course, a lot can happen in that time and maybe that’s too optimistic at this stage but the point is simple. If Yellen envisages full employment by next year, central banks shouldn’t be employing crisis mode monetary policy when that happens.
But that’s a message better employed when the economy is fully open and firing, and the outlook is much clearer. And markets may be better positioned for it at that point. Right now, a lot of positivity is priced in and there’s frothiness everywhere you look. Not the time for taper talk or the tantrum may become self-fulfilling.