Macroscope | Federal Reserve hawks will push for faster tapering, interest rate rises despite Omicron
Amid a warming US economy and growing inflation, Fed hawks will push for rate rises to start as soon as mid-2022 at the next key meeting. But how much the Fed allows tapering to quicken will depend on Omicron risks
Up until two weeks ago, the biggest fear for markets was runaway inflation and how aggressive central banks may become in containing it. However, news of a new Covid-19 variant has cast a shadow over economic growth, and is posing a bigger risk to global economic recovery.
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But the trend is still for central banks, and particularly the US Federal Reserve, to continue to ease off the monetary accelerator. The growing chorus of Fed Reserve committee members calling for a faster interest rate increase has grown in recent weeks, emphasising the importance of the Fed’s next meeting later this month, and there is no certainty that Omicron has changed that.
A group of hawks is called a kettle. A kettle is often formed when hawks take advantage of warm thermal updrafts to climb higher into the sky. This is remarkably similar to the hawkish Fed committee members who are using the warming US economy and high inflation rates to rise above their fellow committee members in calling for a change to the interest rate outlook.
At the Fed’s meeting last month, committee members agreed to reduce the pace of bond purchases by US$15 billion per month and to review the need for further adjustments at the next meeting. In the last few weeks, there have been calls by committee members to accelerate the pace of stimulus tapering and bring forward the timing of the first interest rate increase, possibly to the middle of next year.
This makes sense as the Fed is unlikely to raise interest rates while still buying bonds, so would need to wrap up its latest quantitative easing programme sooner. Somewhat at odds with this has been the Fed’s stance that bond buying is separate from the path of policy rates, but clearly there is a sequence that must be followed of stimulus tapering then monetary tightening.
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Omicron confirmed in 24 countries as new Covid-19 variant continues to spread
Omicron confirmed in 24 countries as new Covid-19 variant continues to spread
Although in its infancy, the tapering process has been rather successful as it created little market reaction before and after being announced. But it may become less smooth for markets if the Fed decides at its upcoming meeting to increase the pace of tapering, as this would signal that the Fed was setting up for an earlier start to interest rate hikes.
