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Federal Reserve System

Fed wary of more 'taper tantrums' over rates

Adam Shell
USA TODAY

They took a June hike off the table, but buried in the minutes of the Federal Reserve's April meeting released Wednesday was the following not-so-subtle warning from the nation's central bankers: when they finally do hike rates, there's likely to be bond market turbulence similar to the "taper tantrums" two years ago when the Fed first hinted that it would wind down its bond-buying program, dubbed QE, or quantitative easing.

Minutes show Fed policy makers are worried about bond market turbulence similar to the "taper tantrums" of two years ago.

Here's the Fed's warning taken directly from the meeting-minutes transcript:

"In their discussion of financial market developments and financial stability issues, policymakers highlighted possible risks related to the low level of term premiums (i.e. low rates)," the minutes read. "Some participants noted the possibility that, at the time when the (Fed) decides to begin policy firming, term premiums (i.e. rates) could rise sharply — in a manner similar to the increase observed in the spring and summer of 2013—which might drive longer-term rates higher."

The Fed added that the volatility this time around could be even more pronounced: "It was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past." Why? Increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds."

Translation: investors have so much cash invested in bonds that price declines could be big if everyone sells at the same time.

The facade of the New York Stock Exchange.
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