— This is the script of CNBC's news report for China's CCTV on August 19, 2021, Thursday.
Aside from the worries about the pandemic, the hawkish signals from the Fed's minutes was a major factor behind the poor performance of U.S. stocks in the overnight session. Minutes from the July Federal Reserve meeting, released Wednesday, show that policymakers have discussed plans to reduce monthly bond purchases likely before the end of the year.
Official jobs data released after the meeting came in much stronger than expected, which led to at least four Fed officials to voice their support for announcing the taper plan in September and executing it at a later stage. Not all of the 4 officials are known as the hawks, which means the Fed's stance on monetary policy is starting to change. That signal sent U.S. stocks south immediately. As the three major indexes fell for two consecutive days, the VIX index, a gauge of market sentiment, shot up over 20% in overnight trading to a 3-month high.
The Fed's current bond purchase plan totaled $120 billion per month, which includes monthly purchases of $80 billion in the U.S. Treasury bonds and $40 billion in MBS. Once the Fed begins to dial back, policy support in these assets will also wind down. On Wednesday, U.S. treasury trading was quite stable, largely because the market had already priced in a consensus that the Fed would begin to scale down the purchase plan within the year. But we did see some pull-back in housing-related assets.
U.S. housing prices have been rising the past year, causing concerns about a potential bubble in the market. After recording a 12-month return of around 50%, three major REITs traded in the United States all pulled back recently.
Now, most market participants expect the Fed to announce taper plans after the September meeting. Investors will closely watch the timeline of execution and details on the scale and speed of tapering. And an earlier-than-expected taper announcement may cause panic in the market, amplifying the scale of correction.
SOT
Kenny Polcari
Slatestone Wealth, Senior Market Strategist
"I think the census for most asset managers is that while they're expecting it, they're expecting you're kind of later in the year, November, December. If we get hit with a surprise announcement meaning it'll start sooner than you know you could be looking at a 10 to 15% correction because whatever happens is going to happen really quick."
It's worth noting that the start of taper is still a long way away from the start of raising the interest rates. Some investors see the potential correction as a buying opportunity. But as inflation stays elevated, the business outlook remains uncertain and a job market yet to reach full capacity, how to go about tightening is still a challenge for the Fed chair.