Markets fall as Fed hints at move towards tapering of stimulus measures

S&P 500 closed down by over 1% on Wednesday evening

The Federal Reserve could shift its policy towards tapering its asset purchasing in the near future on the back of unexpected economic data.

Recent comments coming from officials at the US central bank have suggested this is the case as strong jobs figures and high inflation readings emerged.

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Fed Governor Christopher Waller and Fed bank Presidents Eric Rosengren, Robert Kaplan and Jim Bullard have each publicly declared the need for a September taper.

Additionally, the notes from a Fed meeting at the end of July suggested that the American central bank will reduce its monthly purchases of $120bn of Treasury bonds and mortgage-backed securities.

However, it considers that there are substantial risks in doing so, including the ongoing concern from the Delta variant of coronavirus and the opportunity cost of a lack of hiring.

Stocks closed sharply lower in choppy trading, with the S&P 500 index down by over 1%.

“Today’s market moves and the minutes from the Federal Reserve’s latest meeting serve as a wake-up reminder for just how much markets are conditioned to be running on central bank support,” said Hinesh Patel, portfolio manager at Quilter Investors.

“Markets have become addicted to the sheer volume of money that has been available and this is clearly going to be a drawn-out process to reduce the liquidity it has become so accustomed to.”

The Fed certainly appears to have shifted its position from not even thinking about changing its policy to clearly entertaining the possibility of doing just that.

“As we have seen with various taper tantrums over the years, this spooks markets and is not helped by the mixed messages emerging from central banks,” Patel added.

“However, investors need to be better prepared. The current policy setting was appropriate for mandated economic shutdowns in the depths of a global pandemic, not the better state the US economy finds itself in today.”

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