Has The USD Avoided The Dreaded Taper Tantrum?

Has The USD Avoided The Dreaded Taper Tantrum?

With the US Federal Reserve under increasing pressure, it has announced plans to begin tapering its asset purchase program. Starting later this month, the Fed will reduce its monthly purchases of US Treasury Securities by US $10 billion and Mortgage-Backed Securities by US $5 billion.

The USD’s Response to the Tapering Announcement

Surprisingly, the feared “taper tantrum” — a sharp market reaction to the Fed’s tapering — seems to have been avoided in the forex market. Federal Reserve Chairman Jerome Powell has been careful in preparing the market for this moment. Hawkish comments have been balanced with dovish caveats, ensuring that investors were not caught off guard. Moreover, the tapering discussion has been ongoing for months, providing ample time for the market to digest the implications.

Following the announcement, the USD index (DXY) crossed back over the 94.00 level, reaching 94.33, up 0.53%. This indicates a relatively stable reaction in the forex market, contrary to the sharp sell-offs seen during the 2013 taper tantrum.

Will the Fed Continue to Taper?

Despite the initial step, the Federal Reserve will continue purchasing US $105 billion worth of securities per month, with further reductions contingent on a favorable economic outlook. The Fed has made it clear that its decision to reduce asset purchases will be flexible and will depend on inflation and job growth trends. Should economic conditions deteriorate, the Fed has the option to halt or reverse its tapering process.

Inflation at a Decade High

A critical factor influencing the Fed’s decision to taper is the ongoing high inflation rate in the US. As of now, inflation is at its highest in 13 years, though the Fed maintains that much of the inflation is temporary. The October inflation data is expected to be released soon, with forecasts predicting a modest 0.1% increase.

The Upcoming Non-Farm Payroll (NFP) Report

Another key data point for the Federal Reserve is the Non-Farm Payroll (NFP) report, which tracks the number of jobs added to the economy each month. The October NFP report is eagerly anticipated, with predictions suggesting 400,000 jobs added, though some market participants are forecasting an even higher figure of 450,000.

The past two months have seen significant disappointments in the NFP figures, falling short of expectations. Despite this, the Fed has moved forward with tapering, indicating that it believes inflation and other economic indicators warrant a reduction in stimulus. Treasury Secretary Janet Yellen noted that the US economy is still short by 5 million jobs compared to pre-pandemic levels, which could take years to recover at the current pace of job growth.

Conclusion

The initial reaction to the Federal Reserve’s tapering announcement has been much calmer than anticipated, with the USD showing a stable performance. However, the future of the tapering process remains dependent on ongoing inflation data and job growth. As the Fed continues to assess the health of the economy, the next few months will be crucial in determining whether the tapering process will proceed as planned or face potential adjustments.