Update: How Have the Bond Markets Responded to Last Week’s Fed Announcement?

Filed under: Market Comentary

I want to follow up about the big Fed announcement from last week. Some of the experts that I’m following were predicting that the Fed would double the amount of tapering of bonds that they are buying (both treasuries and mortgage-backed securities).

How Fed Bond Purchases Affect the Market

That would typically be a move that freaks the market out, and makes people stop buying bonds – which raises interest rates. Google “taper tantrum” and you’ll see that is exactly what happened when this same scenario played out back in 2013. They announced that they would slow the rate of purchasing, and the market went haywire, then eventually settled back down and everything worked out.

This Time is Different

This time definitely looks different. The market is almost in exactly the same spot as it was prior to the announcement. The market is taking it exactly how the industry experts were saying: the market is forward-looking and taking it in stride. The market likes the fact that the Fed is finally reacting to the inflation worries, and this move might be able to bring the inflation down.

Here’s where I come off script from the people I’m listening to and add my own opinion: I think we probably have 3 to 6 months to see a drop in inflation. If we don’t, then that’s when things get weird. Stay tuned! By next summer, if the inflation isn’t more in control, then I think that’s where we could see some problems.

So far, so good! Time will tell.

Happy Holidays to You and Your Family

Also, Happy Holidays and Merry Christmas to everyone! I hope you enjoy the season with family!

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