Tapering, Shmapering

Central Banks have been throwing everything but the kitchen sink at the economy since the pandemic broke loose. From interest rate cuts to bond purchasing programs, they did all they could to keep countries, companies, and private households financed and at the best of terms at that. This expansive monetary policy achieved what it set out to do, particularly as government fiscal policies ran in sync. Meanwhile, many economies have overcome the economic woes from the various lockdowns. As fiscal policies especially in industrialized countries are going to remain generous for the next few years, this raises the question whether monetary policy shouldn’t slow down a touch to avoid economic overheating.

The Fed’s open market committee is already openly discussing when to start rolling back the bond purchasesand at what pace this should happen. The community argues that we may get some more detailed information from the monetary policy symposium of the Kansas City Fed. We however think that the Fed will announce first details on its tapering plans at the next FOMC meeting on 22 September. The tapering will probably commence in October or November with a reduction on the order of 15-20 billion dollars per month. If the tapering starts in October, it will be closer to 15 billion dollars per month and a December start would mean 20 billion dollars per month assuming an end of the bond purchase program in May 2022 for both scenarios.

The imminent tapering down of bond purchases in the US should have no major impact on investors. Yields on US government bonds may rise slightly but stock markets should continue to trend up for the remainder of the year in light of the good economic prospects and an emerging peak in new Covid infections. Particularly growth stocks still have potential. The biggest winner from the tapering gap between the US and Euroland will be the US dollar, which may well gain a bit on the euro over the next few months. We think an exchange rate of EUR 1.15 EUR/USD is easily attainable by the end of the year.