Asset bubbles, soaring prices, and an overstuffed repo market.
These economic pressures (and more) are weighing on the collective conscience of Fed officials.
But will Fed Chairman Jerome Powell finally say “uncle?”
Or, in this case, “taper?”
The tapering of bond purchases by the Fed has long been feared by bulls. In late 2018, Powell attempted to put the brakes on quantitative easing (QE) while raising the federal funds rate. Stocks crashed in response.
Now, after unprecedented easing, Powell is expected by some analysts to hint at tapering in the near future, even though he has insisted over the last few months that the Fed isn’t considering tapering in any way, shape, or form.
“As Chairman of the Fed, his opinions take precedence over those from other Fed members. Regardless, other Fed members are not entirely on the same page as Powell,” noted RIA Advisors’ Michael Lebowitz.
Fed officials began to break rank last month as signs of inflation emerged alongside sky-high housing costs.
“We have real excesses in the housing market,” Dallas Fed President Robert Kaplan said in early May.
“The Fed should start the taper debate sooner rather than later.”
It’s been over four weeks since Kaplan’s comment and that debate has yet to happen. But that hasn’t kept him from reiterating his point of view.
“The Fed should start talking about tapering bond-buying soon,” he said again toward the end of last month.
“I am beginning to feel differently regarding the advantages and drawbacks of the Fed’s QE purchases.”
Lael Brainard, who has served on the Fed’s Board of Governors since 2014, also expressed concern over QE.
“Vulnerabilities associated with elevated risk appetite are rising,” she said.
“The combination of stretched valuations with very high levels of corporate indebtedness bears watching because of the potential to amplify the effects of a repricing event.”
Cleveland Fed President Loretta Mester made similar remarks in a recent statement.
“As the economy continues to improve, and we see it in the data, we are getting closer to our goals,” she explained.
“We’re going to have discussions about our stance on policy overall. Such includes our asset purchase programs and including our interest rates.”
So, does this mean Powell has lost the confidence of Fed officials? Moreover, is he now going against the policy consensus?
Probably not. In reality, Powell knows the end is near. Fed officials have been making these comments over the last several months to prepare the market for the inevitable tapering. Each time an official spoke – most notably Kaplan – stocks knee-jerked lower before dip-buyers filled the gap.
Investors are now more ready for an eventual QE reduction as a result. Just take a look at the market’s recent price action for proof. If it was assumed that QE would continue unabated, equities would have broken out into another rally by now.
But instead, stocks remain mostly subdued.
And with little to look forward to, they’re likely to stay that way.
Over the next few weeks, bulls should experience some difficulty spurring on the next leg up. Especially now that the Fed has conditioned investors on what to expect via recent taper comments from its officials.
