Economists believe an accelerated Fed bond tapering is a done deal at this week’s policy meeting, with AMP’s Shane Oliver noting strong economic data and higher inflation risks will see the Fed take its monthly reduction in bond buying from the current US$15 billion to around US$25 billion.
“While Fed Chair [Jerome] Powell may try to separate this from when interest rates will start to rise it will clear the way for a first rate hike in the June quarter and the so-called median dot plot of Fed officials’ interest rate expectations is likely to move from one rate hike next year to three,” Dr Oliver said in his weekly review on Friday.
Earlier last week, BetaShares’ David Bassanese said the accelerated bond tapering could see the Fed finish its bond buying program by around end-March 2022, not end-June, in turn opening up the possibility of a rate hike in May.
“Either way, my base case now is that the Fed will hike rates three times in 2022, with US 10-year bond yields likely to touch 2.25 per cent at some point as interest rate fears reach a peak,” Mr Bassanese said.
Looking across to Europe, Dr Oliver predicted the ECB would remain dovish on rates but its plans regarding asset purchases are tipped to be interesting.
As for the UK, Dr Oliver is 50/50 as to whether the Bank of England will raise rates on Thursday.
He underlined a “big difference” between the Fed and ECB which are making decisions around tapering (i.e. still easing but at a slower rate) and the BoE which is considering rate hikes (i.e. monetary tightening).
The Bank of Japan is expected to deliver its verdict on Friday, with Dr Oliver confident monetary policy would remain on hold as inflation dances around zero.
Back on home soil, Dr Oliver expects the federal government’s Mid-Year Economic and Fiscal Outlook to project a slightly lower budget deficit this year of around $70 billion – down from $107 billion projected in the May budget – reflecting lower unemployment and stronger corporate tax revenue.
Last week, the Reserve Bank of Australia kept interest rates at a record low, but it removed all reference to its previous plan to hold its guns until at least 2024.
Instead, RBA boss Dr Philip Lowe said: “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.”
“This is likely to take some time and the board is prepared to be patient.”
