Risk Management, Trading & Portfolio Strategies

Fed “tapering” proves to be more complex than anticipated

Investors have been left puzzling in recent weeks over the Fed's so-called

Investors have been left puzzling in recent weeks over the Fed’s so-called “tapering” operation, which involves slowly withdrawing its emergency support programs from the market.

Ben Bernanke finds himself in the precarious and unenviable position of the person who has to manage market expectations while steering the U.S. economy between a state of either inflation or deflation, both of which could plunge the nation back into recession, quite possibly taking global markets with it. Ever since word spread about the so-called “tapering” that will begin to happen within the next 18 months, investors, pundits and everyone in between has found themselves trying to guess what the first move out of the Marriner Eccles building will be.

On May 27, The Wall Street Journal published a story by Jon Hilsenrath, a finance and economics analyst well known for his connection to the Fed. In his latest essay, the reporter explores the growing anxieties among the members of the Federal Open Market Committee, which is tasked with setting policy rates for the U.S. financial system. Driving the concerns is the fear that, if the tapering takes place too quickly, the stock market will plunge and bond yields will spike in an out-of-control fashion. The other possiblity is that businesses will settle into a period of anemic growth and dwindling employment.

Hilsenrath also pointed to a survey conducted by the Fed’s New York branch, which found that many investors and traders anticipate the central bank’s latest iteration of quantitative easing will continue for the forseeable future. This influx of roughly $85 billion per month has provided much-needed liquidity in a volatile environment, and any dilution of this amount may push risk levels through the roof and spark a panic. 

In these conditions, investors need to gird themselves for the possible worst. Utilizing risk management software tools can help tech-savvy market participants create structural protections against sudden volatility. Sign up with SmartStops today to learn more about these and other useful market solutions. 

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