Did the Fed intend to tighten QE? After the Fed released the minutes of the December FOMC meeting on interest rates, people started having such associations.
The reason is only one word: narrowing (reduction).
This word caused great market volatility in 2013-2014. Due to expectations that the Federal Bank will tighten QE, much of the funds will be withdrawn from emerging markets and returned to the US. When to start reducing the volume of QE.
The Fed did not really change its direction in December, but this keyword first appeared in the meeting since Jerome Powell became president.
Morgan Stanley chief economist Ellen Zentener analyzed that this shows that the Fed has begun to imagine how to gradually reduce its policy of quantitative easing.
Zentener emphasized that the record of the meeting made policy makers more optimistic about the medium-term prospects for economic growth and inflation. Policymakers agree with the current policy, but have begun to imagine when and how to begin to gradually reduce the volume of asset purchases.
This statement is similar to the interpretation of Bank of America. Bank of America stressed that the Fed will be loose for as long as possible, but at some point the market expects the orthodox stance of countercyclical monetary policy to begin and that the Fed will have to take action.
In line with the latest political evolution, a “blue wave” emerged after the Democratic Party won two senators from Georgia. Democratic Sen. Chuck Schumer believed that checking for $ 2,000 stimuli would eventually become a reality.
Zentener expects fiscal stimulus measures and vaccine allocation to drive 6% GDP growth in the fourth quarter of this year, far above market expectations and estimates. The Fed may begin addressing the relevant discussions in the second half of the year and announces a gradual reduction in debt buyouts at its December meeting, and will take action in January 2022.
According to the Zero Hedge report, the previous Fed tried to gradually exit the market without triggering a market crash, but in 2013 it caused a catastrophe, with bond yields falling by 150 basis points in a matter of weeks. This time, the Fed’s balance sheet has almost tripled and how to get out of the market will obviously be a more difficult task.