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Fed strives to avoid a ‘taper tantrum’

By Tom Hudson, Miami Herald
Published: June 14, 2021, 6:03am

The first time the Federal Reserve announced it was going to cut back on buying government bonds, the investment markets threw a fit. That was in late May 2013. Over the next month, the S&P 500 fell almost 6 percent, and market interest rates jumped.

It is known as the taper tantrum.

The central bank will work hard to avoid a repeat freak-out by investors and traders in the week ahead. The group’s interest rate setting committee meets on Tuesday and Wednesday. It is not expected to move its target interest rate from zero percent. What is less certain is how the agency talks about plans to reduce — taper — the $120 billion of bonds it has been buying each month for more than a year to pump up the pandemic economy.

Talk of tapering has picked up, but not action. The Fed will use its 2013 experiences to guide its communication strategy now. However, the economic realities are much different, providing the opportunity for miscues and mistakes.

The most significant difference today is inflation. Consumer prices popped 5 percent in May. That’s the highest annual jump in more than a decade. Quickly rising prices test the Fed’s threshold for tolerating higher-than-usual inflation in the belief inflation pressures are not permanent.

When the agency’s confidence that the economic expansion is strong enough, its first action will be to begin cutting back on bond purchases. That action may not materialize until late this year. Words will come first. And hints of the words already are being floated. During the last interest rate setting meeting in April, officials talked about talking about tapering.

Several regional Fed leaders have begun sprinkling the taper talk in their public comments ahead of this week’s meeting. They’ve been careful to tie their talk to economic data, while also prudently tipping their hand.

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