A comparison of the financial crisis and now
How quick will the Fed move? That's the question underlying all the anxiety in the bond market that's spread everywhere else. ADFter a brief bounce, US equities are lower again today and after falling to 0.73%, US 5-year yields are at 0.80%.
Here was the Fed timeline after the financial crisis:
- Taper tantrum (May 2013)
- Formal taper announcement (June 2013)
- Taper begins (Dec 2013)
- QE halted (Oct 2014)
- First hike (Dec 2015)
- Balance sheet normalization announced (June 2017)
- Normalization begins (Oct 2017)
BMO highlights that the market is increasingly pricing in a much quicker taper and transition to rate hikes this time:
At issue is that the time between the taper tantrum and the official end of QE end was 17 months and then another 14 months before liftoff. The market is currently pricing in effectively a 6 month-taper to end and 6 months until first hike - or some combination that results in the transition which took 31 months last cycle to be truncated with a year. Certainly, it could happen - but that would imply something has changed dramatically in the Fed's interpretation of the balance of risks surrounding the inflation outlook.
The counter-argument might be that a pandemic-induced recession is different from a financial crisis and that the US fiscal response has been dramatically more-powerful, with perhaps nearly $5 trillion more to come.
