US Fed taper: Market fairly well anticipates and factors in Fed moves

After its two-day policy meeting, the Fed announced on Wednesday that it will start pulling back $15 billion of its $120-billion monthly bond-buying program to pare back the economic stimulus provided during the pandemic.

When the word 'taper' was used for the first time in 2013 by then US Fed chief Ben Bernanke, the market had reacted sharply. This reaction was nicknamed the 'taper tantrum’.

However, since then for eight years the market has been preoccupied with worries related to taper and lift-off. Over the years, the market took in its stride the various terms and buzzwords that were heard. It was very well anticipated that the Fed would increase rates at a certain pace.

But what is expected is very well priced into the market and has been priced all along, said Khemka.

Similar is the case for inflation. The inflation this year or next year is not what is going to bother the equity market valuations, though investors may be bothered and preoccupied and talk about it ad nauseum. The markets are not going to reflect that unless there is a sustainable change in long-term inflation expectations.

The central bank (US Federal Reserve) will "later this month" start reducing bond purchases by $15 billion per month — $10 billion in Treasuries and $5 billion in mortgage-backed securities. This means quantitative easing is likely to continue till the middle of 2022. The Fed also announced that it would not raise interest rates.

However, the market is telling us that this near-term inflation surge or spike is not fed into and not representative of a sustained increase in inflation expectations and that is why interest on the US 10-year bond rate is quoting at less than 1.5 percent.