The Fed may appear coy for now but has little option other than to move towards policy normalisation
The statement of the US Federal Reserve Chairman Jerome Powell post Wednesday’s Federal Open Markets Committee (FOMC) meeting indicates that the Fed is being extremely cautious as far as the signalling of its monetary tightening schedule goes. With economic indicators, including inflation, implying that the withdrawal of the easy monetary policy can begin soon, financial markets have been quite nervous of late. However, the FOMC continued the stance adopted in its previous meeting — to continue an accommodative stance until the economy gets on a sustainable growth path, while closely monitoring progress and initiating discussions on the manner and timing of tapering monthly bond purchases. The statement seems to have assuaged markets, which have become highly dependent on the liquidity supplied by the monthly bond purchases of $120 billion and the dollar carry trade fuelled by the near zero policy rate in the US. This complacency among market participants is, however, not expected to last long as monetary tightening by the Fed is inevitable.
Continued printing of money by the Fed is leading to an overheated equity market, increased appetite for riskier assets such as crypto currencies, floating of Special Purpose Acquisition Companies (SPACs), non-fungible tokens, higher commodity prices, and so on. The US housing market is witnessing a large jump in demand as well as prices, with many economists warning of a bubble there. With investment funds from the US accounting for over 50 per cent of global investible funds, the Fed’s policies are fuelling asset price inflation across countries. The Fed need not worry too much about a taper tantrum as a price correction in financial markets could, in fact, be healthy, taking prices closer to their intrinsic value.