WILL A FEDERAL RESERVE TAPERING DERAIL THE BULL MARKET IN STOCK INDEX FUTURES?


The bears on stock index futures have been encouraged by recent comments from Federal Reserve officials that it may be time to start “thinking about thinking about tapering” the Federal Reserve’s massive asset-purchase program.


The bears on stock index futures have been encouraged by recent comments from Federal Reserve officials that it may be time to start “thinking about thinking about tapering” the Federal Reserve’s massive asset-purchase program. The thought process is that anything that pushes up interest rates, as would be the case in the event of a tapering, is bearish for stock index futures. So far stock index futures have been only temporarily pressured by talk of tapering and probably for good reason.


Chart 1: S&P 500 Futures - Weekly


Federal Reserve Bank of Dallas President Robert Kaplan said it is time for Fed officials to start discussing how to reduce their $120 billion a month in Treasury and mortgage-bond securities buying. He said, “I think it would be wise sooner rather than later to begin gently taking our foot off the accelerator.” In a similar vein, Federal Reserve Bank of Philadelphia leader Patrick Harker said, “We’re planning to keep the federal funds rate low, but it may be time to at least think about thinking about tapering our $120 billion in monthly Treasury bond and mortgage- backed securities purchases.”


And Randal Quarles of the Federal Reserve said that if the U.S. economy turns in the strong performance he now expects, the door will soon open to a debate about slowing the pace of the central bank’s asset-buying stimulus. Mr. Quarles said, “I am quite optimistic about the path of the economy.” He said that he expects inflation to temporarily exceed the Fed’s 2.0% target.


However, there has been one notable dissenter to the Fed’s mantra of “thinking about thinking about tapering.” Federal Reserve Bank President John Williams said, the U.S. economic recovery still needs to make more progress before the Fed should pare its purchases. “I just don’t think the time is now to take any actions.” In addition, Williams said the U.S. economy remains some distance from where it needs to be for the Federal Reserve to pull back on its $120 billion a month in bond buying stimulus. He said the economy has improved and is on a good trajectory, but we’re still quite a way off from reaching this substantial further progress before looking to start slowing the pace of asset purchases.


Source: Chart from QST


16 | ADMISI - The Ghost In The Machine | Q2 Edition 2021


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