Jackson Hole: Tapering, Tightening, Timelines, and Tantrums

Like most business meetings in 2021, the Federal Reserve’s (Fed) annual symposium in Jackson Hole, WY, convened virtually—a precautionary measure taken in response to rising COVID-19 cases that robbed central bankers of majestic, mountainous vistas of the nearby Grand Teton. What this year’s summit lacked in scenery it certainly made up in substance, as investors parsed the policymakers’ speeches for signs of when the central bank will transition away from the ultra-accommodative monetary policy that it instituted during the pandemic’s peak.

Just as importantly, markets listened for hints of how the Fed is thinking about tapering (reducing the monthly volume of assets it purchases) versus traditional tightening (hiking its policy rate, known as the Federal Funds Rate). The last—and historically only—time when the Fed announced it intended to pare back its monthly purchases sent markets into a tizzy, a volatile episode now referred to as the “Taper Tantrum.”

WILL THIS TIME BE DIFFERENT?

There are good reasons to think that history won’t repeat itself.

1. Policymakers have learned to not “drop a bombshell” into a newsfeed like they did in 2013, and instead to socialize the message well in advance.
2. The Federal Reserve continues to reiterate that tapering does not automatically begin a countdown to tightening, and that monetary support to the recovering economy will evolve one step at a time, without strict deadlines for future steps.
3. Markets, too, have learned from the previous “Taper Tantrum.” So, this will not be their first time at the tapering rodeo.

WHAT SHOULD INVESTORS MAKE OF ALL THE JARGONY PRONOUNCEMENTS?

AMG now expects that the Fed will use its next regularly scheduled meeting to “announce a coming announcement,” then present a tentative schedule of reductions in its monthly purchases during the Federal Open Market Committee (FOMC) meeting after next. Volatility in rates may very well tick up slightly as markets try to interpret the path forward, but unlike in 2013 there will be fewer unknown variables.

Policymakers will then wait for the right circumstances to begin monetary tightening. At present AMG expects the necessary preconditions—including lower unemployment and further recovery in the services sector—to materialize in late 2022, but this horizon may change if inflation proves less transitive than presently expected or if the labor market revisits pre-pandemic conditions within the next two quarters. Neither scenario is AMG’s present Base Case, but continuing vigilance is warranted in these extraordinary times.