If you think the Federal Reserve has been happy with the rapid
rise in Treasury yields, particularly the 10 year yield, you would be mistaken.
The Fed has to be very uncomfortable
with the velocity of this recent move, which has seen the 10 year yield climb
up from 1.6 percent to 2.9 percent in just 3 short months. So how does the Fed keep the 10 year yield
from climbing even higher, even as their policies are being questioned? The Fed tapers asset purchases.
The central bank likely believes that is creating a number of
possible asset bubbles that will only get worse if the Fed continues down the
current path. The Fed is probably
becoming fearful that any further increase in speculative driven behavior could
threaten the financial stability of the U.S. banking system in the future. Tapering will show the markets the Fed is
very serious about creating price stability and is working to return capital
markets to normal function.
However, tapering could rattle the markets as it comes at a time
when economic data has been mixed to slightly weaker than expected. Rattled markets would likely mean a flight to
safely (treasuries) which could push down the 10 year yield. In this scenario the Fed gets everything they
want – lower interest rates, less asset purchases each month, and less
liquidity flowing into the stock market.
Can someone say Goldilocks?
