Forget Fed taper talk

20 May 2021 Written by:Mansoor Mohi-uddin (Chief Economist Bank of Singapore)

The Federal Reserve’s April meeting minutes raised fears the central bank may soon consider scaling back its quantitative easing to the detriment of risk assets.

  • Overnight, the Federal Reserve’s April meeting minutes raised fears the central bank may soon consider scaling back its quantitative easing to the detriment of risk assets.
  • We think talk of the Fed tapering its bond buying, however, is premature given the US economy is still far from reaching its goals of maximum employment and stable inflation.
  • To avoid another taper tantrum, the Fed has said it will give plenty of warning before it starts slowing down its pace of quantitative easing.
  • We expect officials will only begin discussing tapering after the summer before announcing in December the Fed will start reducing its bond buying from early next year.

Overnight, the Federal Reserve’s April meeting minutes raised fears the central bank may soon consider scaling back quantitative easing (QE).

Currently, the Fed is printing money and buying USD120 billion a month of bonds to support the US economy’s recovery from the pandemic. Its QE over the past year has been far more forceful than its three rounds after the 2008 financial crisis - as the chart shows - thus helping risk assets rally strongly.

The central bank’s Federal Open Market Committee (FOMC) has promised to keep its current pace of asset purchases unchanged ‘until the economy had made substantial further progress toward the Committee’s maximum-employment and price-stability goals.’ But the latest FOMC meeting minutes noted: ‘a number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.’

The ‘taper talk’ hurt investor sentiment overnight. But we think speculation the Fed will start slowing down its bond buying soon is premature.

First, the US unemployment rate at 6.1% shows the labour market is still far from the central bank’s goal of maximum employment (before the pandemic the jobless rate was at 3.5%).

Source: Bank of Singapore, Bloomberg

Second, key data releases since the Fed’s April meeting have been weaker than expected. Last month payrolls only rose by 266,000 against expectations that one million workers would return to the labour market. April’s retail sales were also flat after surging by 10.7% in March and May’s University of Michigan consumer sentiment survey surprisingly fell from 88.3 to 82.8.

Third, the Fed has committed to giving plenty of warning before slowing its pace of bond buying. Policymakers are keen to avoid another ‘taper tantrum’ when financial markets in 20213 reacted adversely to the central bank’s abrupt announcement that it would start unwinding its third round of QE from the 2008 financial crisis.

This week Vice Chair Clarida observed: ‘we have not made substantial further progress’ towards reaching the Fed's goals for employment and inflation for the FOMC to consider tapering bond buying. Clarida also promised ‘we will certainly give advance warning before we anticipate scaling back the pace of those purchases.’

We expect the Fed will only start discussing tapering after the summer when FOMC members will have seen several more months of data. If increases in inflation above the central bank’s 2% target over the summer prove temporary - as officials forecast - then the Fed’s dovish policymakers are still likely to wait until as late as December before announcing the start of tapering from early 2022.

This article was first published by Bank of Singapore on May 20, 2021. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of Bank OCBC NISP Private Banking Tbk. or its affiliates.

OCBC NISP Private Banking provides a suite of products for wealth creation, preservation and transmission including holistic wealth management services, independent research, customized solutions for all investor preferences, and genuine open architecture, with expertise in Indonesia and Asia Pacific markets. OCBC NISP Private Banking is a part of OCBC Group.

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