Global Growth May Slide As The Fed Tapers

This article was written exclusively for Investing.com.

Bond yields and the dollar have been moving sharply higher of late as the market prepares for the Federal Reserve to wind down its bond-buying program. The anticipation for this change in monetary policy is sending rates on the shorter-dated maturities higher and the dollar along with it. However, the longer-dated maturities have seen their rates collapse in recent days, flattening the yield curve. 

The strong dollar and the flattening curve appear to be sending a warning message. The market seems to be getting concerned that perhaps the shifts in monetary policy will result in slower global growth due to rising short-term rates and the implication of a stronger dollar. It would seem the Fed has given the market too much time to prepare for this policy change. 

The Dollar Is Getting Stronger/h2

The dollar index has moved sharply higher since bottoming on Sept. 3, rising by more than 2% to around $94. The dollar is nearing a potentially big break out, which could send it to as high as $98. To get the index moving higher towards that next level, it needs to clear a resistance level at $94.60. The relative strength index has been steadily trending higher, suggesting there is strong bullish momentum behind the dollar’s move up. 

Yields Are Rising/h2

The 2-year rates have also been pushing higher and are now trading at 35 bps, the highest level since the spring of 2020. The move higher on the 2-year confirms that the bond market sees a Fed tapering event very soon. Additionally, the act of tapering should result in the 2-year climbing to even higher levels, as the Fed begins to reduce its asset purchases. In 2014, the last time the Fed ended its bond purchase program, the 2-year was trading over 50 bps, up from around 20 bps in the spring of 2013. 

The 10-Year Has Doubts/h2

However, the 10-year seems to have a different opinion on the matter, as it has seen its yield rise only slightly since the beginning of September and has now turned sharply lower in recent days. Since peaking on Oct. 11 at 1.63%, the yield has dropped back to roughly 1.51%. It seems that the longer-end of the curve may be starting to get worried about what the stronger dollar and the Fed removing accommodation may mean for future global growth rates. 

It would seem that investors are beginning to realize that as the Fed tapers, it will be removing some very easy financial accommodation, which to some degree is not all that different from tightening. These tighter conditions will come while the dollar is growing stronger, which will weigh heavily on global growth. A stronger dollar will bring higher prices to any country that buys commodities priced in dollars, finances its debt, or conducts any primary form of business. The purchasing power of the local currency depreciating leads to slower growth. 

It may turn out that the Fed is waiting so long to begin the tapering process, it has given the market too much time to prepare, resulting in the effects of a Fed taper being put into motion too early. Now, the act of tapering will be coming as the effects are starting to be felt, which may make the equity market very jittery as it sees growth rates slow even more across the entire globe and yield curves flatten due to a stronger dollar and tighter financial conditions. 

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Written By: Michael Kramer