The pace of rate increases accelerated after Mr. Bernanke elaborated a month later, saying that — depending on the state of the economy — further asset purchases could come to a halt as early as mid-2014.
At a moment when the U.S. economy was struggling to emerge from the global financial crisis of 2008 and 2009 — with unemployment at 7.5% and inflation at roughly half the Fed's 2% target — market participants around the world were mostly caught off guard.
Mr. Bernanke's May 22 testimony "shocked financial markets by alluding to the possibility that the Fed would need to taper its asset purchases and begin to normalize policy rates that had been stuck at the zero-bound'' since the global financial crisis, said Brij Khurana, senior managing director and portfolio manager at Boston-based Wellington Management.
The sharp move up in yields, on the back of the Fed simply mentioning that it was thinking about slowing down the pace of purchases, was — at the same time — a shock for market participants as well as a possible sign they had become, in the interim, a bit spoiled by aggressive Fed market support, said Marvin Loh, Boston-based senior global strategist with State Street Global Markets.
That 2013 backdrop stands in stark contrast to the challenges facing the economy and the Fed today — a combination of historically strong employment, solid consumption growth and uncomfortably high inflation.
In a further contrast to the taper tantrum, market players have responded fairly coolly to the most aggressive central bank hiking cycle in decades — a surge of 500 basis points for the federal funds rate since March 2022.
One thing that ties these two periods together, noted Jim Caron, New York-based co-CIO of Morgan Stanley Investment Management's global balance risk control team, is the disconnect between what Fed officials are saying and how markets are reacting.
Ten years ago, markets chose to interpret a modest tweak in Fed policy as a dramatic shift, while today they're discounting guidance that the central bank is intent on keeping rates at restrictive levels, he said.
Some market veterans, meanwhile, contend the Fed would be in a stronger position today if it had moved more decisively to take away the proverbial punch bowl in the face of the market's unexpectedly strong response to Mr. Bernanke's testimony a decade ago. "They backed off a little too aggressively," fostering the notion of a "Fed put" that would limit downside risks, said State Street's Mr. Loh.
Tantrum was an apt word for the reaction to Chairman Bernanke's comments, with market players effectively saying, "I'm enjoying this and for purposes of my interest, I don't want you changing course," said Ash Williams, vice chair of J.P. Morgan Asset Management.
With the benefit of hindsight, an argument can be made that "the longer game would have been to ignore" the tantrum and tighten sooner, a move that could have left the Fed in a stronger position to deal with the challenges of today's inflationary environment, said Mr. Williams, who served previously as chief investment officer and executive director of the $181.5 billion Florida State Board of Administration, Tallahassee.
Instead, what distinguished the taper tantrum was "a very short-term orientation" by market players and, to some extent, by policymakers as well, he said.
The lesson to be gleaned from a 10-year look back might be that "policy that's right for the longer term is the right policy, even if in the short term it causes some pain," Mr. Williams said.
Market veterans, meanwhile, credit the taper tantrum for the emergence of the Fed's chairman and board members as high-profile public figures today, in contrast to the Delphic Oracles of previous eras.
Growing transparency surrounding Fed policy over the past decade — including "CNBC interviews, chair-led press conferences and the dot plot" — can be tied at least in part to the "indelible mark on the Fed" left by the taper tantrum, with a noticeable effect on the market's ability to digest central bank policy changes, Wellington's Mr. Khurana said.
"Over the last 18 months, you can really see that this was a lesson learned," especially when it comes to foreshadowing big changes in monetary policy and how they're thinking about things, said Alexandra Wilson-Elizondo, co-head of portfolio management for multiasset solutions with New York-based Goldman Sachs Asset Management.
Noted Mr. Khurana: "It is interesting to juxtapose the 2013 environment to today. At that time, the market reacted sharply to even the hint that monetary accommodation might change, and the uncertainty caused the yield curve to steepen significantly."
But today the Fed has engineered the most aggressive tightening cycle since the Volcker era, and equity and credit markets in particular have barely reacted, in part because markets understand the Fed's reaction function so well, he said.
Even so, Mr. Khurana noted, that comfort with the Fed's reaction function can have downsides as well, making it more challenging for the central bank when it's looking to tighten financial conditions. Markets with greater leeway to be surprised can experience steeper yield curves and wider credit spreads — resulting in some of the tightening that would otherwise fall on the central bank's shoulders, he said.
And while market players, in contrast to 2013, believe the rate hiking cycle that commenced in early 2022 is already nearing a peak, likely to be followed by a long stretch at relatively high levels, that prospect of relative stability hasn't translated into low volatility indicators for U.S. Treasury yields, noted GSAM's Ms. Wilson-Elizondo.
Instead, the ICE BofA MOVE index for options pricing on interest rates in March surpassed the volatility readings seen at the most uncertain moments of the pandemic crisis three years before, reflecting market nervousness about potential "second order effects" of higher interest rates, such as the failures that month of Silicon Valley Bank and Signature Bank, she noted.