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Fed QE Tapering Talks Reaching A Crescendo (05 August 2021)

TVC:DXY   U.S. Dollar Currency Index
Just a couple of days before the release of the long-awaited U.S. nonfarm jobs report, several Federal Reserve committee members expressed their hawkish views on an QE tapering.

Fed Vice Chairman sees QE tapering to start this year.
During his speech at the Peterson Institute for International Economics yesterday, Fed Vice Chairman Richard Clarida said that together with the other committee members , they expect the U.S. economy to continue recovering towards the central bank’s “substantial further progress” standard although this was not met in July. Also, Clarida highlighted that if his “baseline outlook does materialize”, then he expects the announcement for quantitative easing ( QE ) tapering to be made later this year. With the progress made in recent months, he believes the Fed is ready for a first round of tapering by year-end.

In regard to interest rate, Clarida explained that the three conditions required before the Fed considers a rate hike are:
  • Labor market conditions reaching levels consistent with the Fed’s assessments of maximum employment
  • Annual inflation rising to 2%
  • Annual inflation is on track to moderately exceed 2% for some time
And in a scenario whereby the Fed’s economic projections realized over the forecast horizon, Clarida believes that the three conditions will be met by the end of 2022, thus anticipating a rate hike in 2023.

Other committee members in favor of carrying out QE tapering soon.
Fed committee member Robert Kaplan said in an interview yesterday that the Fed should start tapering QE soon and gradually as this will give the central bank more flexibility in the future in terms of interest rate adjustments. He also highlighted that continued progress in the job market for July and August should warrant an early tapering of QE .

Another Fed committee member James Bullard also supported the idea of an early tapering of QE during an interview with the following reasons:
  • Economic growth in 2021 will likely exceed the central bank’s projection of 4%
  • Unemployment rate has declined much faster than projected
  • Annual inflation for 2021 will likely surpass the projected 1.8%
Hence, Bullard believes it will not be an issue meeting the criteria to get QE tapering started.