Why I’ve Changed My Mind About the Fed’s Next Big Move

When my son was about 9 years old, he threatened to run away. He packed a Mickey Mouse bag with a soccer shirt, a baseball hat, one sock (dirty), and a box of Fruit Roll-Ups. 

No longer would he tolerate the tyranny of the Opdyke household, where 9-year-olds were asked to help Dad rake the leaves! 

He’d decided a Lord of the Flies, life-in-the-wild existence was the solution. 

However, a couple of hours later, he was still at home, plopped on the couch, playing a video game.  

I asked him why he hadn’t chased his freedom. He told me it was because his mom had reminded him that there was a Hannah Montana special on the Disney channel that night and he’d miss it if he ran away. 

That’s the way it goes in life.  

New information arrives. Perspectives change. What seemed assured one minute suddenly seems flimsy the next. 

Like, say, the Federal Reserve cutting back, or tapering, its bond purchases this year… 

Right now, the Fed is spending $120 billion a month on bond purchases to support the economy.  

Much of this money makes its way onto Wall Street and into stocks. This helps explain why the market is at such irrational highs. 

Once the Fed starts tightening the free money tap, however, Wall Street will almost certainly throw a “taper tantrum”…meaning stock prices would plunge. 

This is a subject I’ve been writing a good bit about this year because it’s perhaps the biggest shadow hanging over the market. 

For its part, the Fed has suggested that a tapering is likely by the time Santa arrives.  

The market seems to think that’s likely, too, based on all the commentary I’ve been reading from various big Wall Street firms. 

 
Previously I was on board, too. Now I’m no longer convinced, however. Especially when you consider that: 

• Federal unemployment checks that began in summer 2020 to address mass, COVID-induced unemployment, are now ending, leaving millions of families in dire financial straits; 

• Mortgage forbearance is coming to end for millions of homeowners, meaning the housing market is about to go through a bout of existential angst; 

• The Supreme Court has deep-sixed Prez. Biden’s eviction moratorium, meaning we could see hundreds of thousands, maybe a million or more renters and homeowners who are behind on rent and mortgage payments kicked out of their homes; 

• And jobs growth in August was about one-third of expectations—a disappointment only slightly less huge than the final season of Game of Thrones. 

Ruh-roh, as Scooby Doo would say. 

These new clues have me thinking Fed Chairman Jerome Powell and Co. might not pull the plug on that $120 billion the Fed is pumping into the bond market every month. Not just yet, at least. 

The economy is suddenly showing symptoms of a pandemic relapse.  

The delta variant is running roughshod through the country. Restaurants and bars are falling by the wayside again as consumers refrain from risking exposure.  

Corporate America is already telling Wall Street to expect weaker quarterly profits. And federal and state governments are brainstorming new tactics that could resemble in some fashion last year’s lockdowns. 

Is the Fed really going to taper into that environment? 

Or, like my son, is it going to instead plop itself onto a figurative couch and play video games until the threat passes? 

I’ve watched and written about the Fed for decades. I don’t see Fed board members risking a recession by pulling so much money from the economy.  

Sure, spending $120 billion a month to goose the economy was the wrong approach to begin with, but taking it away now, at a particularly vulnerable moment, would not serve the Fed well. 

The Fed would be vilified. 

Stocks would plunge. Consumer sentiment (already down 18% between July and August) would collapse. Jobs would vaporize. Unemployment would shoot up. And Congress would be back to exactly where it doesn’t want to be: sending out oodles of stimmie checks and reimposing eviction bans and whatnot so that us roused rabble don’t go apoplectic and burn the place down. 

I now expect the Fed will hold off until spring 2022 before tapering begins. 

And if today’s signs of weakness weaken even more…well, then, it seems probable that tapering is toast for a good while longer.