The Good, Bad, And Ugly "Taper" Scenarios

Tyler Durden's picture

As important as when the Fed might taper its asset purchases is why it might do so. Uncertainty about the Fed’s QE reaction function, BofAML argues, is a significant contributor to recent market volatility. There are several scenarios that could explain why a number of Fed officials have started talking about tapering: they have become more optimistic on the outlook; they are more worried about potential QE costs; they have decided to taper earlier for largely technical reasons. The first of these likely would be the least disruptive for markets, and the last the most. Clear Fed communication could mitigate some of the volatility, but, as BofAML notes, the current lack of consensus on the FOMC likely means uncertainty will likely persist.


Via BofAML,

The good news taper

Several Fed officials have sounded more optimistic on the outlook recently, including noted doves (and current voters) Charles Evans (Chicago) and Eric Rosengren (Boston). Other core Fed officials, such as Chairman Bernanke and New York’s Bill Dudley, sound less convinced in recent remarks and seem to have reluctantly acknowledged that tapering before long is not outside the realm of possibility. If we get a sustainable improvement in the job market data and inflation converging back toward target, that outcome should leave the markets relatively comfortable with the Fed beginning to modestly pull back its accommodation. In that case, markets should be able to transition from Fed-led liquidity support to a better growth-led recovery story.

The bad news taper

The ride could be bumpier if markets conclude the Fed has grown more concerned about QE costs and is ending QE prematurely. We don’t see these concerns motivating the voting majority to taper early: Bernanke and Dudley, for example, admitted to monitoring for financial instability but concluded that the benefits of continued QE outweigh the costs. For some market participants, the current talk of tapering is at odds with the still weak outlook, leading them to conclude that the Fed isn’t acknowledging its true degree of concern over QE costs. Others disagree with the Fed’s current assessment of risks, and expect the Fed will eventually have to tighten policy much sooner than they have indicated. In either case, the process will be more volatile: tapering seen as premature is likely to spur risk-off behavior and increases the odds that the Fed will eventually decide to scale back up their purchases should the data worsen.

The not-so-timely technical taper

A view gaining some traction is that the Fed is discussing tapering because it actually has a lower threshold than indicated, perhaps for some technical reason. There are several variations to this view: the Fed wants to introduce volatility; it wants to “send a message” to the markets; it wants to test a small taper to see the response. Such scenarios would be quite tricky for market participants: they not only fail to clearly identify the Fed’s longer-term reaction function, but also presume the Fed, in part, is hiding its true motives.

The Fed does not typically work this way - not only do these stories run counter to the greater transparency under Bernanke, but they tend to undermine the Fed’s ability to satisfy its dual mandate. Thus our temptation is to fade these stories, but we cannot completely rule out some kind of early, small, technical adjustment to QE. The Fed is limited by a lack of consensus over QE, but they arguably could clarify their reaction function better than they have to date.

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AldousHuxley's picture

Good: bankrupt celebrities are back on reality gaming shows

Bad: China decided to buy oil in RMB instead of USD

Ugly: Creditors are calling in

spinone's picture

There are two things to keep in mind when analyzing the fed's options. 

1.  Who owns the fed.

2. Who benefits from each option. 

When the two answers are the same, you figured it out

kliguy38's picture

Its very long will the world allow counterfeiting to continue? The cost of essentials breaking down their internal populations stability as the long arm of stagflation strangles the vast masses of peeps......will be ultimate determinate of this grand experiment. Its already happening...just a matter of how long before the stretched rubber band breaks

lotsoffun's picture

bennie and dudley?  they work for gs and jpm now primarily, and those boys getting rich.  pumping to continue.  didn't you see it?  unemployment up.  now - they are going to play the game the other way.  QE  got unemployment down, way, down since 2009, and now it is going back up, so - come on muppets, what does that mean?  QE worked to a point and  now  more is needed.


disabledvet's picture

We'll have to wait and see. Ironic given all this "transparency." obviously the minutes of the last meeting will be significant as they moved the market. Having said that I really don't think we're on the cusp of a major tightening cycle...even if the dollar suddenly collapses, inflation breaks out all over the place and the USA descends into even further mayhem.

SpykerSpeed's picture

Why is silver down to $21.60 lately?  I thought it was supposed to explode in price once the market acknowledged the supply was falling and demand was increasing.  What's up, Zero Hedge?  Whatever happend to "buy silver and crash JPM"?

I'm genuinely curious.

yabyum's picture

Spyker, I try not to worry about the price of silver. I would ask Blythe, but she is occupied. gargling my balls.

SpykerSpeed's picture

This is exactly the type of reply I expected to receive on Zero Hedge.  You guys are so predictable.

yabyum's picture

Maybe you should seek wisdom/knowlege elsewhere, just a thought.

StychoKiller's picture

Homeowner's insurance seems like a complete waste of munny...until your house burns down.  They who have eyes, let them read (and hopefully understand!)

SpykerSpeed's picture

What does this even mean?  Why can't I get a straight answer to my question?

fonzannoon's picture

where can you buy silver for $21.60?

SpykerSpeed's picture

At the COMEX if you take delivery, apparently.  Not that tough.

LoneCapitalist's picture

Spyker, The reason silver has gone down in price is because demand for silver has dropped off dramaticly. Wait, no that hasnt happened. Its because of the huge increase in supply lately. No, no that hasnt happened either. Why dont you tell us why the price of silver has dropped so much recently.

0z's picture

Margin Calls.

Sell liquid assets to cover your precious carry trade.

Besides, from 7$ a few years back to 21.60$ is not a bad return.

Wait till those Money Markets get slammed in reverse, looking for safety.

Besides, silver is not an investment, it's just good money (Money that shows no difference between its face value and commodity value).

21.60$ (SIN3) = The price of possible solvency on delivery day in July.

~ 25-30$ (Nearby Bullion dealer, limited availability) = The price of immediate solvency

55$ (JPM) = The price to bet an the share of a house or Rogue traders.

StarTedStackin''s picture

I can get it for $23/oz right now with free about 1 month......

auric1234's picture

Tell Benny Boy I appreciate the discount.


Stuck on Zero's picture

Spyker, be patient.  The Central Banks are the casino owners and they have unlimited bank accounts.  They are the Martingale bettors and can win any and all betting engagements with anyone.  That will continue until it can't. At that point you will not be able to buy PMs.  Enjoy the paper subsidized PM prices while you can.


Bear's picture

More sellers than buyers

jonjon831983's picture

Did ZH specifically urge to buy silver and crash JPM?

Ungaro's picture

SpykerSpeed, your belief in fundamentals (supply and demand) are misguided. In order for the CBs' paper chase (Abezuka, QEternity, the Draghi put) to work, faith in the fiat must be maintained. To do that, the competition (PMs) must be weakened or destroyed. To to that, the CBs sell the paper proxies of PMs and the arbs do the job on the physical.

When you put your faith in PMs, you are not only betting against the Fed but challange all the central banks of the world. That is a lot of fire power, which does not mean that you are wrong, it just means that you are playing with fire near the biggest and leakiest propane tank on the planet. In your corner you will find 6,000 years of human history and in the opposing corner, all the CBs engaged in competitive currrency devaluation.

The best way not to play the game, IMHO, is to avoid speculating in PMs and PM derivatives. Use 10% of your income every year to buy phyisical metal, take delivery, store it in a safe place (forget bank safety deposit boxes) and stop watching and caring about the price in USD or EUR or CAD (which makes no sense anyway). Never sell, only accumulate. Use only as a medium of exchange when no other is accepted. 

PiltdownMan's picture

Will The Fed taper at all? If they do, rates will rise and The Fed, Fannie Mae and Freddie Mac (ALL heavily invested in fixed-rate instruments) wiil get creamed.

See here:










ebworthen's picture

No tapering, no exit.

It will take a very long time for employment to get to 6.5%

Watch those bond rates, if the 10 Year T-Bill gets to 2.5% Ben will come out with QE4 (or is it 5?).

q99x2's picture

When a heroin addict starts talking about "tapering off" hide your wallet.

lolmao500's picture

So no big deal... but the new ``freedomz`` Libyan government just murdered 27 protesters so far today...

Time for another liberation?

toadold's picture

Welllll, things are getting a bit spooky out there.  All the scandals of the administration, the potential serious court actions heating up, possible wars and acts of terror. The most biased polls show growing animosity toward the administration and the government.  If things go bang they may decide it is time to pull a Volker. Not to prevent disaster but to climb out of it. Those *holes know very well what stagflation looks like.   So they may be practicing for financial collapse, while at the same time crossing their fingers and hoping a miracle will happen and they won't have to do it.  Given what's happening already....good luck with that. 

hooligan2009's picture

seems like i'm allowed back on the net...yay

ok..about this taper..couple of observations.

1. except for possibly government guaranteed fraudie and funny debt (oops, chit, freddie and fanny) all that QE does is swap maturity dated and coupon bearing government bonds for zero coupon perpetual (zeros and ones) cash. the "markets" tolerate this sleight of hand, because the "market" has been bailed out and is already bankrupt because non-performing loans exceed equity by a large multiple and the "market" has run out of quality collateral to secure p/l on 6 trillion net swap exposures. tax payers tolerate this because they don't have to pay interest on their profligate mobocratic rights via fiscal deficits. swapping bank notes for government debt is a government book entry and achieves double O, triple O fuck all blank as far as economic activity is concerned. it can't..since when did a pile of cash ones and zeros ever amount to anything but paper assets that produce...ummm..woodworm, homes for moths? remember that all coupons and profits or losses"incurred" by the Fed (which are all book entries anyway) are simply exchanged with the treasury via a polite echange guessed it...paper in letter form.

2. tapering is a reverse of the above, it has zero impact in economic activity. it is a book entry between one government department (the Fed) and another (the Treasury). 

3. the appalling arrogance of saying that inflation in the price of monetary assets is not inflation to the general consumer is only surpassed by the complete lack of understanding in the MSM. people's finances are subject to as much inflation as is there non-financial inflation in the form of household bills. look at it this way. is it inflationary to a consumer to have to pay 1 million dollars for a 40,000 pension (4% annuity rate), rather than "only" 500,000 for a 40,000 pension (8% annuity rate)? similarly, as the consumer saves money, IS IT NON-INFLATIONARY to pay to accumulate capital at a price of 140 for a thrity year bond rather than 100...or tp pay 206 for IBM rather than 150, or 875 for google rather than 600?

so there you have it..QE is a sleight of hand and achieves nothing and the prices of financial assets are just as much a component of inflation, as a utility bill.

and while we are at come colleges charge for sitting exams? why aren't they free on the internet? seems that paying 140,000 to a bunch of tenured academics who prevent education for free to ayone is not a good idea.

let's see how long my internet lasts this time!

Milestones's picture

Hooligan--Item #2. Both are government agencies. Wrong. The Fed is a privately held corporation; and therein is the main stumbling block. As I have pointed out before, Congress was specifically, under the Constitution, to regulate the value thereof(money) but was illigally delegated to the FED. That delegation is not for the Congress to delegate as that power belongs solely to the Soverignity (We the people---do ordain this constitution for the United States of America) Under Marbury v Madison (1803)The Federal Reserve Act of 1913 is VOID.

In a nutshell, that delegation of power which was directly given to the Congress by the Constitution and was given away illegally; because President Wilson also did not have the authority to sign that bill into law under the same ruling as above.          Milestones

hooligan2009's picture

well, we will agree to differ. monetary policy and fiscal policy are two sides of the same coin when you have a mobocracy with the central bank support fiscal profligacy and/or bad management. think of it this way..does the government print money when it runs a deficit (takes more in taxes than it spends)? or does it withdraw cash in exchange for i.o.u.'s and then if the fed prints cash to buy i.o.u.s what actually happens in this circular arrangement.

i believe q/e is pretty much a fraud. q/e has nothing to do with monetary or economic policy unless you view printing money as a cure for bankrupt sovereign state. i don't think experiences anywhere and latterly zimbabwe and soon to be japan, bear out.

CheapBastard's picture

House sales are frozen in time and even my realtor said, "Better sell now if you're going to sell." She feels the rise in rates will cause house prices to 'correct downward' by which I suspect she means "revert to the mean."

Bear's picture

The taper is just a canary in the mine shaft, just as Cyprus tested bad bank risk, taper talk tests the market reaction risk.

jonjon831983's picture

Expect that Bernank will pull an ECB when they raised rates a couple years ago.  He'll do some sort of tightening... then he'll leave (as ZH has mentioned) as a way to give some wiggle room for the next guy.  Then the next guy will get the pressure (ie. people will beg him/her) to loosen it up again.... and again... and again... until things go to hell.

Ungaro's picture

The Fed needs to taper the vapor they issue forth ("if and when conditions merit..." and "as the incoming [grossly manipulated data] supports it...") but more importantly, they need to stop breathing their own exhaust about the steadily improving economy. The Fed governors should take a field trip out of their taxpayer-funded cocoons into the real world and collect some experiential data points on how real people get by.

surf0766's picture

The Fed can never tapper. This is already known and anyone who thinks that can tapper should not be writing anything.

Remington IV's picture

Talk about sitting on a fence ..... hmmmmmmmmmm