SoFi Blog

A Note on the Taper

Now that the markets are accustomed to heightened tensions with North Korea, attention is shifting back to monetary policy once again. In the aftermath of the global financial crisis, several of the world’s central banks employed extraordinary measures to help stabilize economies. Now the question is how are they going to scale back, or “taper,” those policies and what affect that will have on asset prices.

Good Data, Bad Geopolitics, and Exchange Rates
Asset prices remained relatively flat over the past month, caught between the push of positive economic data on equities and the pull of geopolitical tensions. While North Korea’s nuclear threats sent equities and interest rates down, we see these events subsiding without major implications for global markets. In determining where the markets will go over the next few months, it’s important to take a look at the interaction between economic data, central bank policy, exchange rates, and equity prices.

In recent posts, we’ve talked about the difficult situation currently facing central bankers. Their mandates essentially require them to begin raising interest rates just when the market’s starting to take off in order to curb inflation. It’s like the host taking away the punch bowl just when the party’s really getting started.

Monetary Policy and the Phillips Curve: Global edition.

We’ve seen a moderate increase in stock price volatility this June and early July as comments by European Central Bank president Mario Draghi about rolling back stimulus sent interest rates higher and equities lower globally. More recently, mixed data and comments by Federal Reserve Chair Janet Yellen sent U.S. interest rates back down slightly. A lot has happened in the markets, but looking at events in terms of how central bankers view the relationship between unemployment and inflation can help us make sense of this activity and what may happen going forward.

A Closer Look at the State of the U.S. Economy

It’s been a relatively quiet month for the market. Equities and fixed income continue to grind higher as investors doubt a near-term revival in inflation. And, with little expectation that tax cuts will be implemented this year, the markets have taken little notice of the relentless political drama coming out of Washington. Given the lack of major market events, we’re taking a step back to focus on the unique state of the U.S. economy right now, how the Federal Reserve might respond, and what it means for the market.

U.S. stocks are strong; developed world stocks are rallying, but still uncertain; and despite some investors’ fears, emerging markets are still appealing. Here’s what’s been happening in the market over the past few weeks.