April 17, 2017 / 9:07 PM / in 3 months

Fed's Fischer sees no repeat of 'taper tantrum' this time around

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Federal Reserve Vice Chairman Stanley Fischer in Jackson Hole, Wyoming August 28, 2015.Jonathan Crosby

NEW YORK (Reuters) - The muted market reaction to recent hints from the U.S. central bank that reductions to its $4.5 trillion balance sheet could begin later this year suggests the policy shift may go smoothly after all, Federal Reserve Vice Chair Stanley Fischer said on Monday.

Fed policymakers want to avoid the sharp bond market selloff that followed the last time the central bank reversed course on its balance sheet policy, in 2013. That so-called taper tantrum sent bond yields up sharply, ultimately forcing the Fed to delay plans to scale back bond purchases and prompting it to retool the way it gathers information from investors about their expectations for Fed actions.

But in the last several weeks, several policymakers and minutes from the Fed's March meeting have suggested the Fed may start to trim its balance sheet late this year, sooner than what the average Wall Street bank had been predicting. Bond yields however moved little in response.

"My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum," Fischer said in remarks prepared for delivery at Columbia University.

Since the 2013 taper tantrum, the Fed has changed how it surveys investors, and now has a better picture not only of the average Wall Street view but also of how strongly banks, hedge funds and asset managers hold those views, Fischer said.

That detailed survey data suggested that, unlike in 2013 when some market participants were betting heavily that the Fed would not trim its bond purchases any time soon, investors today have been less sure about how soon the Fed would begin trimming its balance sheet, Fischer said.

Those results, he said, "suggest that the factors that exacerbated the taper tantrum, dispersed but firmly held beliefs, may be less pronounced in current circumstances than they were at the time of the taper tantrum."

Reporting by Jonathan Spicer, writing by Ann Saphir; Editing by Meredith Mazzilli

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