Despite having long maintained its commitment to keeping low interest rates till 2023, the inflation pandemic continues to spread within the Federal Reserve Open Market Committee (FOMC). With inflation expectations rising, murmurs of a rate adjustment have grown louder in the committee. 

“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” said the minutes of the US central bank’s April FOMC meeting. 

For now, however, the consensus remains that the pace of asset purchases remains unchanged. In line with previous pronouncements, no adjustment will take place “until the economy [has] made substantial further progress toward the Committee’s maximum-employment and price-stability goals.’

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But this was not enough to quell the unease felt by markets about inflation. Bank of Singapore chief economist Mansoor Mohi-uddin noted that the “taper talk” hurt investor sentiment overnight. Still, Mohi-uddin sees that speculation of a slowdown in Fed bond buying now is premature given that economic fundamentals in the US remain relatively weak. 

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For one thing, US unemployment stands at 6.1% at present vis-a-vis 3.5% pre-pandemic. This is far from the central bank’s goal of maximum employment in the labour market. Last month’s payrolls only rose by 266,000 - far short of the 1 million seen to re-enter the labour market. 

“April’s retail sales were also flat after surging by 10.7% in March and May’s University of Michigan consumer sentiment survey surprisingly fell from 88.3 to 82.8,” adds Mohi-uddin in a May 20 economics research note. 

In any case, the Fed would prefer not to spring a surprise on investors should it decide a rate hike is required. Policymakers, he says, would like to avoid the drama of another “taper tantrum” after markets reacted badly to an abrupt end to QE3 in the wake of the Global Financial Crisis in 2008. 

Federal Reserve vice-chairman Richard Clarida says that the US economy has “not made substantial further progress” towards reaching the Fed’s goals for employment and inflation for the FOMC to consider tapering bond purchases. “We will certainly give advance warning before we anticipate scaling back the pace of those purchases.,” he promises. 

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Mohi-uddin sees the Fed only starting tapering discussions after the summer as more data becomes more available. If increases in inflation over the summer above the Fed’s 2% target prove temporary as expected, he says, policymakers will likely wait until December before announcing the beginning of tapering starting early 2022.