Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Michael Gayed: What Makes Tapering Different From Tightening

By

Here's how speed and inflation expectations play a role.

PrintPRINT
There is nothing either good or bad but thinking makes it so.
-- William Shakespeare

For the past several months, the Federal Reserve has been going out of its way to differentiate tapering from tightening. The thought process here is that even if the Fed pulls back on the pace of its current quantitative easing program, rates will remain exceptionally low on the short end until unemployment and inflation targets are met. A reduction of stimulus is not the same as a hawkish policy, or so the discussion goes. Yet, the construct and debate over tapering and whether that equates to tightening needs to be reconsidered.

First, tapering absolutely can be perceived as tightening depending on how the market reacts. If yields were to spike again as they did in May-July, that is a hawkish reaction by the bond market and can be quite damaging to the economy (especially housing). As a matter of fact, the Fed purposely did not taper in September because of "tighter financial conditions," which was code for the yield spike that took place. If tapering causes a significant move in yields, it's a rate hike, pure and simple, and serves as a deflationary shock.

When is tapering not tightening? When inflation expectations trend higher and yields do not spike. Believe it or not, we may be getting nearer to that type of a scenario. While inflation expectations have been notably disconnected from US equities all year, there are some signs at the margin of an improvement. Take a look below at the price ratio of the iShares TIPS Bonds Fund ETF (NYSEARCA:TIP) relative to the nominal iShares 7-10 Year Bond Fund ETF (NYSEARCA:IEF). As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less) the denominator/IEF.



This is one way (among others) of tracking inflation expectations. Note the far right of the chart, where some minor picking up of inflation expectations seems to be taking place. This, combined with what appears to be improvement in commodities at the margin, might mean the market has not only discounted tapering, but is now beneath the surface and starting to expect that inflation may begin to rise near term despite headline data, which indicates quite the opposite. Clearly the trend is very early and must hold, but this remains the key to determine whether tapering is tightening.

Anyone care to guess how many times I used the word taper for this article? I'm going to bet "too many…"
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE