WASHINGTON—Investors barely reacted last week when Federal Reserve officials signaled they could announce plans to start reducing their bond buying later this year. That was a relief for policy makers eager to avoid a repeat of the market turmoil that erupted in 2013 when the Fed made a similar announcement.
The Fed’s next test will come when it outlines a concrete plan for when and how it will scale back, or taper, the asset purchases.
The central bank has been buying $120 billion a month of Treasury and mortgage securities since June 2020, a pace officials say will continue until the economic recovery advances further. By bidding up the price of long-term bonds, the purchases tend to hold down borrowing costs for businesses and consumers, since bond prices and yields move in opposite directions.
Some investors worry that yields will jump significantly higher when the Fed stops buying bonds. The Fed’s indication in 2013 that it would eventually wind down an earlier bond-buying program sparked such an episode, dubbed the taper tantrum.
But research by economists and Fed staff in recent years has found that tapering need not provoke a tantrum.
