Saqib Iqbal and Ira Iosebashvili

(Reuters] – In 2014, the Federal Reserve tapered its operations. This was followed by sharp gyrations of Treasury markets. They helped set the stage for a major rally in U.S. dollars.

With the Fed widely expected to soon begin an unwind of its $120 billion in government bond buying, here’s a comparison between the market backdrop around the time of the Fed’s most recent unwind and today.

TAPER TIME

The Fed’s taper of the $85 billion a month bond buying program, which it began in response to the 2007-2009 financial crisis and recession, ran from January 2014 until October of that year.

Since then the central bank’s balance sheet has ballooned to $8.6 trillion as policymakers slashed rates to near zero and rolled out a raft of measures, including monthly government backed bond purchases, as they fought to support the economy in the wake of the COVID-19 outbreak last year.

On Wednesday, the central bank will conclude its November monetary policies meeting.

(For graphic on The Fed’s balance sheet – https://fingfx.thomsonreuters.com/gfx/mkt/klvykzxamvg/Pasted%20image%201635880981244.png)

THE DOLLAR

(For graphic on Yield spread – https://fingfx.thomsonreuters.com/gfx/mkt/egvbkmzrjpq/Pasted%20image%201635880822573.png)

Although the U.S.’s monetary policy in 2014 was not hawkish, it was in direct contrast to ultra-dovish central banks in Japan, Europe and Japan, which were continuing full support for their economies through stimulus, while the Fed cut its bond purchases.

The widening gap between yields on U.S. Treasuries bonds and those in government bonds from other countries triggered a surge in the dollar. It rose almost 13% in 2014 against major currencies.

Global monetary policy is now different. Some investors believe that the central banks of Canada, U.K. and other countries will soon increase interest rates in an effort to counter a surge in global inflation.

Analysts said that signs the Fed may be more worried about inflation than previously stated could boost U.S. rates, potentially supporting the greenback.

BOND YIELDS

In 2013, bond yields shot up after Ben Bernanke, then chief of the Fed, made a reference to Bernanke’s thoughts on plans to reduce its monetary support during a speech before Congress.

(For graphic on Treasury yield – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwlrdovo/Pasted%20image%201635880671039.png)

Fed Chair Jerome Powell tried this time to get markets ready for taper’s start well in advance.

The U.S. bond markets are still experiencing volatility as investors speculate that the central banks will be less hawkish than they expect to fight inflation.

In the meantime, rising yields due to expectations for tighter monetary policies and recovery have put America’s bond market in its worst year since 2013. Prices are inversely related to yields.

(For graphic on Rough sledding in the bond market – https://graphics.reuters.com/USA-FED/INVESTORS/akvezadxmpr/chart.png)

STOCKS

They reached near-record highs in the wake of the Fed’s taper, which began in 2014.

Though stocks are at records today as well, valuations have ballooned over the years, leading some investors to worry that some areas of the market–including the big growth and technology stocks that make up a large chunk of the S&P 500–may be more vulnerable to higher yields and a more hawkish monetary policy stance.

(For graphic on Stock valuations – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkraoxlvm/Pasted%20image%201635881622218.png)