Macroscope | Why Fed’s determination to reboot US economy should calm investors’ taper jitters

The central bank’s work is far from done, despite the better-than-anticipated economic recovery, as unemployment numbers must continue to come down

Bond investors will continue to test the Fed, but the near-zero interest rates on short-dated Treasuries indicate there’s little pressure to raise rates for now

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The Federal Reserve building in Washington, DC. Instead of obsessing over the timing of a tightening in policy, bond investors should listen more carefully to the Fed. Photo: Bloomberg

Published: 1:30am, 19 Mar 2021Updated: 2:15am, 19 Mar 2021

For an accurate assessment of the mood in financial markets since the beginning of this year, look no further than the findings of the latest edition of Bank of America’s global fund manager survey, published on March 16.

For some time now, the devastation wrought by the Covid-19 pandemic has ceased to be a key determinant of sentiment, mainly because of the vaccine breakthrough in November last year, but also because of increasing anxiety about the adverse financial consequences of a stronger-than-anticipated economic recovery.

According to the results of the survey, for the first time since the pandemic erupted in March last year, respondents no longer viewed the virus as the biggest threat to markets. Instead, a stronger-than-expected surge in inflation and a disorderly sell-off in bond markets were perceived as the most important “tail risks”.

In the space of just a few months, investors have gone from fretting about a resurgence of the virus in Europe and the United States to worrying about the possibility that a much stronger rebound in America’s economy will force the Federal Reserve to begin withdrawing stimulus earlier than planned.

With markets anticipating the biggest growth spurt in generations, underpinned by the enactment of US President Joe Biden’s US$1.9 trillion spending programme and the pent-up demand unleashed by the vaccines, bond investors have taken fright.

The yield on the benchmark 10-year US Treasury bond – which was still under 1 per cent in early January – has surged to 1.6 per cent, in part due to a sharp rise in inflation expectations. A market gauge of consumer prices, known as the 5-year breakeven rate, has shot up to its highest level since 2008.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Why Fed’s determination to reboot US economy should calm investors’ taper jitters

Macroscope | Why Fed’s determination to reboot US economy should calm investors’ taper jitters