‘Taper’ Talk Is Back: Will A Tantrum Follow?

‘Taper’ talk from the Federal Reserve is back in focus. But for now, it’s all talk and no action.

Last week, former New York Fed President William Dudley said the central bank will begin the process of tapering – winding down its monthly asset purchases – by year-end.

While echoing current Fed policymakers’ position that the recent spike in prices is “transitory,” Dudley acknowledged the likelihood of inflation persisting above 2% longer-term.

“I think in the long run, are we going to see inflation... above 2%,” he said. “I think the Fed is going to succeed in doing that."

Inflation Ahead

The latest Consumer Price Index report due out on Thursday could be a doozy. The CPI is likely to come in even hotter than last month’s 4.2% annual increase.

The Fed may be forced by inflation realities to start tapering sooner than it (and Wall Street) would like.

Some Fed watchers are eying the August Jackson Hole gathering of central bankers as a potential time and place for officials to signal strongly on tapering.

A “taper tantrum” redux could roil markets heading to the fall.

Back in May 2013, then Fed chairman Ben Bernanke announced plans to taper the Quantitative Easing program. It was only words at that point, not action. Nevertheless, the stock and bond markets responded by throwing a tantrum marked by a spike in Treasury yields.

Gold prices also sold off, although they had been in a downtrend in the months prior to the Fed’s taper talk. The gold market finally bottomed out in late 2015 at $1,050/oz.

This time around, Fed Chairman Jerome Powell will undoubtedly tread more carefully when it comes to announcing any move toward curtailing bond purchases, i.e. monetizing the federal debt with new money creation.

More importantly for the outlook on precious metals markets, this time around inflation pressures are much more acute.

The pressures on the Fed to help facilitate record-high government borrowing at artificially low rates are also much more pronounced today than they were a few years ago when budget deficits were much lower.

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Disclaimer: Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment ...

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