July 16, 2022
  • July 16, 2022

Is the Fed about to signal the start of its reduction in bond purchases?

By on September 20, 2021 0


Bond and equity markets are signaling that peaks in growth and earnings have been reached or, as markets look to the future, are about to be.

In response to the pandemic, the United States spent nearly $ 5,000 billion in about 18 months. With that spending nearly exhausted, fiscal policy will tighten in the United States even if Biden manages to push his agenda past Republicans in the Senate.

The other dilemma for the Fed is that the pandemic has not gone away.

While more than half of the American population is fully vaccinated, and nearly two-thirds have received at least one injection, the politicization of vaccines and other non-medical measures in the United States and outbreaks of the Delta variant mean that the pandemic is still hanging over the region. segments of the economy.

At the same time, companies have reported labor shortages, supply chain disruptions, rising raw material costs, and cost inflation more generally. In response, they raise prices, causing some inflation.

What the Fed does and says is important, given that it sets benchmark rates for most other economies, thereby influencing their monetary policies and their currency, bond and equity markets.Credit:PA

It’s a messy and uncertain mix of influences that the Fed sees and the financial market environment doesn’t provide much guidance.

Bond yields remain subdued, although they have risen slightly from last month’s lows. The 10-year bond yield is 1.36%, well below the 1.75% reached in March. The stock market, which steadily posted record highs earlier this year, has weakened over the past fortnight, slipping about 2.5%.

It could be argued that the bond and stock markets are signaling that peaks in growth and earnings have been achieved or, given that the markets are looking to the future, that they are about to be.

What the Fed does and says is important, given that it sets benchmark rates for most other economies, thereby influencing their monetary policies and their currency, bond and equity markets.

A decision to pull out of the Fed’s latest quantitative easing and, at a later time (but potentially as early as the first half of next year) to start raising U.S. interest rates, will have global effects and not just on financial markets.

Public debt in most economies has exploded in response to the pandemic. Ultra-low rates have also seen corporate debt in the United States and some other markets increase dramatically.

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The amount of “junk” debt issued in the United States so far this year already exceeds any full year on record, while the Institute of International Finance said total global debt hit a record $ 296 trillion. of dollars in June. In June 2020, it was around $ 270 trillion.

Any increase in US and global interest rates will therefore have a much larger impact on debt service costs and debt sustainability than it would have had before the pandemic.

There is also a political backdrop to the Fed’s deliberations, with Joe Biden pondering whether to extend Powell’s term as president for another term or replace him with someone more acceptable to the “progressives” of. his side.

Replacing the Fed chairman even as Congress continues to hammer down the US debt ceiling, bringing the US ever closer to a technical default on its debts, would add another element of uncertainty and of risk to American economic management.

Over the next several weeks, starting with this week’s Fed meeting, the outlook for some of the most critical economic decisions facing the United States – monetary policy, the Fed chairmanship, the cap on the Fed. debt and Biden’s economic agenda – will become clearer. Given the implications of these decisions, not only for the United States but for the rest of the world, it is to be hoped that they decide wisely.

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