Risk Management, Trading & Portfolio Strategies

When — and how — will the Fed’s taper take place?

The Federal Reserve could continue its stimulus programs for the foreseeable future.

The Federal Reserve could continue its stimulus programs for the foreseeable future.

Ever since Federal Reserve Chairman Ben Bernanke uttered the now-infamous word “taper,” market participants have been anxious to see precisely how this single-word policy will take shape. Investors eager to divine the exact timeline of the taper have so far been disappointed, as Bernanke and his associates at the Marriner Eccles Building have remained tight-lipped ever since.

Previously Bernanke has said that the Fed will wait until the unemployment rate drops to 6.5 percent and inflation exceeds 2.5 percent before the Fed starts raising interest rates. The latest unemployment numbers came in at 7.6% and inflation is running below 2%, far from his stated action trigger points. However, Bernanke’s recent comments have many investors wondering if he won’t wait to reach those triggers before he takes action and begins to taper.

Given the recent market performance, it’s possible to glean some insights into how the taper will actually take place. Given that one of the Fed’s primary mandates is to promote “full employment” – which historically has hovered around 95 percent of the working public – its likely that the final decision will be based on the next few jobs reports. The most recent report, released earlier this month, indicated that the U.S. economy created roughly 195,000 jobs. While this is still technically growth, the reality is that this rate barely keeps up with the birth/death ratio for American workers. In the end, results like this will likely push the Fed to continue its monetary stimulus programs.

Those hoping for a different sign of tapering might want to watch overall market volatility. Big industries such as housing and construction – which have benefited immensely from the Fed’s quantitative easing – could see future earnings deteriorate if the economy nosedives and demand for those services dwindles. The Fed, seeking to stem losses, could buy more than the standard $85 billion in Treasury bonds and mortgage-backed securities if the Federal Open Market Committee feels that it needs to intervene further. As one can imagine, this would render the idea of tapering essentially moot.

Ultimately, only time will tell whether or not the Fed taper will actually happen. Investors in industries heavily reliant on credit may find themselves in an increasingly risky position if the Fed begins to withdraw its support, and as such, these folks might want to look into portfolio management tools to assist them in monitoring their holdings. SmartStops are a useful way to prevent excessive losses from occurring in a volatile trading environment, so click here to learn about how this technology can help. 

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