Cut stimulus, and say goodbye to the stock market's armor. That's been the bet for a decade. Now the moment has come. But no signs of catastrophe have arisen.
Bulls can thank the stagecraft of Jerome Powell, the Federal Reserve chairman, who on Friday gave the strongest signal yet that the central bank will begin tapering its monthly bond purchases this year.
Not only did the dreaded T-word fail to halt stocks' steady climb, the S&P 500 Index posted its biggest gain in a month, and put in its second-best Jackson Hole week since 2014.
No More Tantrum?
Powell did just enough to preserve the view that his goals align with investors': growth that is fast enough to boost hiring and earnings but not inflation, and an approach to stimulus that avoids shocks and leaves actual interest rates alone. While other Fed speakers sowed angst with hawkish pronouncements in recent days, Powell's messaging defused the tension.
"Powell and the Federal Reserve should get a lot of credit for telegraphing the tapering conversation and avoiding a tantrum," said Michael Arone, chief investment strategist at State Street Global Advisors' U.S. SPDR business. "I think they can take a bit of a victory lap."
Back in 2013, news that the Fed would slow its purchases of Treasuries and mortgage-backed securities following the global financial crisis caused a convulsion in markets. Investors rushed to sell riskier assets for the safety of bonds in an episode nicknamed the "taper tantrum."
But bad memories of that shouldn't fuel conceptions that the upcoming paring of asset purchases will do the same, said Art Hogan, chief strategist at National Securities.
"What happened in 2013, as opposed to what's happening today, was a drive-by announcement of taper," he said in a phone interview. "Today, we have the opposite of a drive-by taper announcement — we've got a well-choreographed, well-telegraphed plan and the transparency has alleviated any adverse market reaction because it's so well-known."
Fed Bank of Dallas President Robert Kaplan told Bloomberg in June that policy makers learned lessons from 2013 and hoped to avoid a repeat. And hints that the taper would start by year's end have been in the public record at least since the Federal Open Market Committee meeting in July, according to minutes of that gathering.
