What You Don’t Remember About the Taper Tantrum

(Bloomberg Opinion) -- The jump in global bond yields this past month has drawn many analogies to the so-called taper tantrum of 2013, a market upheaval triggered by comments from then-Federal Reserve Chair Ben Bernanke about gradually reeling back quantitative easing. Unfortunately, these references don't accurately capture that pivotal episode, or the circumstances around it. Without fully understanding what unfolded almost a decade ago, it's hard to properly assess the challenges confronting officials today, let alone anticipate what comes next.

May 22, 2013 was a bright Wednesday morning in Washington, shortly before the Memorial Day long weekend and the unofficial start of summer. The Joint Economic Committee of Congress, not the most influential panel, was listening to Bernanke testify. His written text, where most consequential Fed signals are typically found, was boilerplate. It was an exchange with Representative Kevin Brady, the Texas Republican who led the committee, that caught the attention of traders. He asked Bernanke when the Fed might begin to step back its asset buying, one of many measures deployed after the global financial crisis. “We could, in the next few meetings, take a step down in our pace of purchases,” he said. Bernanke's next few sentences were laden with caveats. It was very careful stuff, hardly declarative and certainly not an announcement.    

Sitting in my office across town, where I was responsible for Bloomberg News's economics coverage, the back-and-forth didn't seem particularly striking. Minutes of the past few meetings of the Federal Open Market Committee had conveyed roughly similar messages. I was looking forward to spending the coming week by the beach in North Carolina with my son.  The remarks didn't seem like an epochal event that would delay my plans. I went ahead with the trip.

Yet each time I checked email and messages, there were fresh commentaries about the end of QE, a Fed blunder or financial tumult in anticipation of higher rates. Did I miss something? Markets told me I had. By the time trading closed that day, the yield on the 10-year U.S. Treasury note surged 11 basis points, breaching the 2% mark. Trading volume popped to the most since 2004. Markets convulsed in Europe and Asia and interest rates on emerging-market debt climbed. 

Now, as Treasuries are in upheaval once again, some similar questions are reviving. Investors are wary that growth and prices will pick up faster than the Fed anticipates, and have started to question official pledges of ultra-low borrowing costs into the foreseeable future. But 2021 isn't a carbon copy of 2013. A couple of key differences are being overlooked in the rush to find a suitable historical analogy. 

First, in 2013, there was the unanswered question of succession. Bernanke had previously signaled that he would be stepping aside when his second four-year term ended the following February. Would the next Fed chair be more hawkish or dovish? Quantitative easing was, at that point, still considered a once-in-a-blue-moon emergency tool that would return to the history books. The answer to this question was critical in determining when that would happen.

While then-Vice Chair Janet Yellen went on to become an excellent Fed chief, her path to the top was by no means clear. Lawrence Summers, regarded as more skeptical of ultra-easy money than Bernanke or his deputy, was said to be the initial front runner. Only when he withdrew in September did Yellen become the clear pick and she was officially nominated in October. Though Powell's term ends in February, there is little chance of him being succeeded by someone more hawkish. Yellen, now Treasury secretary, will have a huge say in that decision. Powell may well get a second term. Even if he doesn't, it's unlikely she will opt for a hard-money type. 

Another key difference is the level of openness about the future path of rates. The Bernanke-era Fed didn't devote the same amount of airtime to this debate as officials do now. Investors had more latitude to guess, or to imagine dire scenarios. By contrast, Powell and his top lieutenants have made it clear that QE's end is likely years away and rates won't nudge higher until some time after that.

It's also important to remember that back in 2013, the Fed still anticipated inflation would return to 2% in the not-too-distant future. How quaint! Central bankers the world over have now made it clear that they want to see evidence of inflation, not just sense it's coming. Many are now happy for the pace of price increases to average 2% over time, and are comfortable exceeding that level for a while. Powell reiterated his dovish position Thursday, even as investors pushed bonds lower in anticipation of faster economic growth and some pickup in inflation. “We will be patient,” Powell told a Wall Street Journal webinar. “We're still a long way from our goals.” He conceded that a climb in yields had attracted his attention, but largely held his ground. 

So why the disconnect in 2013 between markets and policy? And what clues does it hold for the near future? It may come down to knowing your audience, JPMorgan Chase & Co. economists said in a Feb. 17 note. People whose job it is to watch every word falling from a Fed official's mouth, parse every paragraph and review every working paper aren't always the same folks setting market prices hour-by-hour. In mid-2013, policy makers admitted being surprised by market moves, given surveys of primary dealers were aligned with Fed thinking, wrote Jay Barry, Michael Feroli and Joshua Younger. “As Vice Chair [Stanley] Fischer later noted, respondents to those surveys tended to be Fed watchers and not necessarily market participants,” the trio wrote.   

Clashes between central banks and markets make for a great story — even if it isn't clear who's winning the current standoff. But when people throw around the phrase “taper tantrum,” take a moment to consider what it really means. Chances are, they're referring to an event that responded to a multitude of triggers, not all of which had much to do with a brief conversation between Ben Bernanke and Kevin Brady. The history of monetary policy is being rewritten, and not necessarily for the better.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.