Time for Taper Tantrum Two?

Yesterday’s March FOMC minutes dropped the bombshell that the Fed will stop reinvesting maturities and prepayments in its asset portfolio, running off its balance sheet and ending the age of QE. It is disturbing that there was no mention of this in the FOMC statement, and barely a hint in the press conference, but we think it is actually of little consequence. The empirical record of the effect of LSAPs on markets is spotty, and gives no intrinsic reason to fear that stocks will collapse or that long-term yields will surge higher. Theoretically, all they do is de-risk the market by putting maturity and duration risk on the Fed’s balance sheet. This may have been key in the risk-averse era of “secular stagnation,” but it is useless if we are in a “turning” toward greater risk-tolerance.