The Fed Announced It Would Stop Buying Bonds, Carefully
In early November the Federal Reserve said it would begin reducing its monthly asset purchases. The announcement was engineered to be as boring as possible, and the contrast with 2013 explains why.
The Decision
At its early November 2021 meeting the Federal Reserve announced it would begin reducing the pace of its monthly Treasury and mortgage backed securities purchases. Note the wording carefully, because it is the source of most confusion about this event. The Fed was not selling anything and it was not shrinking its balance sheet. It was buying less each month than the month before.
The balance sheet continued growing throughout the taper, just more slowly. Slowing the rate of increase is not tightening in any conventional sense, which is why the language mattered so much.
The 2013 Precedent
In 2013 the Fed chair suggested in congressional testimony that purchases might slow at some future point. The remark was not a policy decision and no timeline was attached, but the bond market reacted violently. The ten year Treasury yield rose more than a percentage point over the following months, mortgage rates jumped, and capital fled emerging markets.
The episode became known as the taper tantrum, and it entered institutional memory as a lesson about communication. The policy had not changed. Only expectations about future policy had, and that alone was sufficient to move global asset prices sharply.
Central banks move markets by changing expectations, so the announcement of a future action is itself the action.
How 2021 Was Engineered Differently
The 2021 approach was the opposite of a surprise. Officials discussed the conditions for tapering for months in speeches and minutes. The pace was specified in advance. The Fed repeatedly and explicitly separated the taper from interest rate increases, insisting that ending purchases did not imply imminent hikes.
The result was close to a nonevent in markets, which was the objective. Long yields barely moved on the announcement. Communication had absorbed the shock over the preceding months rather than concentrating it into a single day.
The Part That Aged Badly
An honest account cannot stop at the successful execution. The taper was announced while inflation was already running well above target, with the October consumer price reading reaching a thirty year high, and it was designed to conclude gradually over the following months.
Within weeks the Fed accelerated the schedule, and shortly after purchases ended it began the fastest tightening cycle in four decades. The careful, telegraphed, deliberately dull sequence was overtaken by data almost immediately.
The criticism is not that officials communicated poorly. It is that they were still adding stimulus, through continued asset purchases, while inflation ran at multiples of target, because they had committed publicly to a gradual path and unwinding that commitment quickly carried its own credibility cost.
The Bottom Line
The 2021 taper was a communications success and a timing problem. Avoiding a market tantrum is worth something, and it is worth less if the schedule you protected turns out to be far too slow for the data.