For well over 18 months the Federal Reserve has provided a needed backstop of liquidity so massive that it would seem unbelievable if our economy would never recover.
That accomodation has happened by way of extreme bond purchases to the tune of "at least" 120 billion a month. This buying, along with a zero-interest rate policy, has kept conditions very favorable for the average American and businesses alike.
Nobody really knew the extent of the damage to the economy by the COVID pandemic, and nobody really wanted to find out. But in a master stroke, Chair Powell and the Federal Open Market Committee put down the gauntlet and stated they would remain vigilant to keep the economy vibrant.
Game, set, match!
Further, their generous accommodation was to continue until they were satisfied with the employment data - more Americans put to work (one of their two mandates from Congress is full employment, the other being price stability).
But there needs to be an endgame to all of this generosity. The Fed cannot continue to print money, buy bonds daily without having some negative affects to prices and the economy. That's the challenge for the committee -- when is the right time to halt purchases. The minutes of the most recent meeting reflect a bold inference to taper their bond purchases -- sooner rather than later.
As the markets are driven hard by liquidity, one can guess investors would not take that new sitting down. Last Wednesday saw Round 1 of a potential "taper tantrum;" the indexes lost some 1%-1.2% on the day after moving higher near the opening print. With several Fed Governors out talking the talk (loudly!) about a bond purchase taper plan it would come as no surprise if during the September meeting we hear when that may start.
Given the strength of the economy and the potential for a very strong job report to come, it's time for the Fed to get ahead of the curve and not behind it, else risk some sharp damage to the economy.
