Dampening the taper talk
The main point about this week’s Federal Reserve’s meeting (on 27 January) is that President Biden’s fiscal plans are unlikely to bring forward the timeline for the reduction of the Fed’s asset-purchase programme, currently running at USD120 bn per month. In other words, Fed chairman Jerome Powell is going to push back against the idea that ‘tapering’ of quantitative easing (QE) is around the corner, even though the Fed sees growth accelerating this year. We still think that QE tapering is more of a Q1 2022 story than a late-2021 one. And when it starts, the reduction in purchases will be a long process spread over several months if not a year, pushing the first rate hike even further out.
In fact, we do not think the Fed will hike rates before 2025, in part because of our view that consumer inflation is unlikely to be a threat. Furthermore, the Fed moved the goalposts on its inflation threshold when it announced its ‘average inflation targeting’ strategy last summer.
We still believe the Fed could actually increase QE in the coming months as part of the implicit help it is providing to the federal government to finance a sizeable budget deficit. In any case, the Fed will continue to monitor long-term Treasury yields very closely.
Overall, both fiscal and monetary policy in the US should remain very growth friendly. Powell is unlikely to worry about how asset prices are being boosted by the Fed’s loose monetary policy, although some (for now isolated) regional Fed presidents are growing increasingly uneasy. However, amid the worrying spread of new coronavirus variants, the main near-term focus is set to be progress in the vaccination campaign.