Amid the fierce debate over a possible Syrian intervention and the repercussions for the world economy – the oil market in particular – discussion regarding the Federal Reserve's eventual tapering of monetary stimulus has been muted in recent weeks. Yet the issue has continued to simmer beneath the surface, with some economists and financial pundits arguing that the Fed may have already lost its golden opportunity to begin reeling in the support.
Let's unpack the issue by exploring what could happen should the Fed announce tomorrow that it is going to begin tapering on a specific date. There would certainly be a market correction, although it's unclear how severe such a movement would be. It's likely that the reaction will be less than feared because the Fed will no doubt offer an action timeline in a bid to reduce market instability and uncertainty, which have been the hallmarks of volatility since the Fed first began intervening in the market directly in 2009. Investors would also probably receive the assurance that any economic deterioration – specifically large, consecutive market plunges and a precipitous climb in the unemployment rate – would spur renewed support.
Some argue that the former of those two characteristics – the risk of several big corrections – is what may be underlying the Fed's reluctance to tackle the issue of tapering directly. Implying that it might need to come back and offer more support to the nation's financial system could become a self-fulfilling prophecy. In a recent white paper for its clients, Goldman Sachs speculated that the Fed may abandon its employment-related goals for quantitative easing, as such goalposts could leave it on the hook for years of renewed assistance.
"Although the conceptual argument for guiding expectations in terms of economic outcomes as opposed to the calendar is sound, we noted at the time that this only works well in practice if the unemployment rate is a good catch-all indicator of broad economic and labor market performance," the author wrote. "Unfortunately, this has not been the case recently, and Fed officials are likely to respond by trying to loosen the shackles that they have imposed on themselves."
Simply put, the Fed's own guidelines for tapering could be altered, an act which may shift the sand enough to allow for more Fed stimulus until the market is better adjusted. This, of course, implies that the Fed will announce a definitive tapering date, which it has given no indication that it will do in the near future.
In the meantime, investors should prepare themselves for market volatility when the Fed finally acts. Portfolio management tools that help individuals gauge and react to mounting market risk will become more necessary. SmartStops can protect investors from mounting losses by offering a clear-eyed view of the market with support systems that make for more informed investing, reacting and adjusting. Explore our website further to learn more about how our system works!
Categories: Risk Management, Trading & Portfolio Strategies