US inflation's so persistent that US policymakers do not consider it as 'transitory'. Will the US Fed become the first major global central bank to hasten to taper of its asset purchase program?
The US Federal Reserve’s two-day policy meeting is underway, and policy corridors are abuzz with speculations of speeding up the tapering program.
As per Wall Street economists, the US Fed may announce that the central bank will accelerate the pace of tapering asset purchases and prepare for raising interest rates in 2022 due to the growing risk of persistent higher inflation.
Further, they expect the Fed to announce a $30 billion reduction in asset purchases, starting in January 2022, doubling the pace two months prior and aiming for ending asset purchases in March 2022.
Chris Wood, who is the global head of equity strategy at Jefferies, for instance, recently said that the latest US payroll data confirmed expectations of accelerated tapering.
Moreover, if the end of the tapering is brought forward to March, it would also mean that there could be three rate hikes in 2022, he said.
Echoing similar views Philip Marey, senior US strategist at Rabobank International, expects two rate hikes in 2022 given US Fed chair Jerome Powell’s apparent shift to inflation-fighting, and the assumption that the negative impact of Omicron on the US economy remains limited.
Given that Fed Chairman Jerome Powell recently said that it was appropriate to consider wrapping up the central bank’s taper of asset purchases “a few months sooner” as the risk of higher inflation has increased, the timeline for the same is something that the market participants will keenly track.
Remember, a tighter monetary policy by developed countries like the US can disrupt world asset markets and fall particularly hard on developing countries like India where rising dollar costs would be painful.
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