In a world where sovereign bond yields are in the hand of central banks, the recent upward revisions of growth expectations for the US economy raised questions about the outlook for the Fed’s monetary policy. Growth is expected to rebound in H2 and very accommodative monetary policy is not a free lunch. The difficulty for the Fed is estimating how sustainable this expected improvement in growth and inflation will be in H2 2021. We expect the Fed to keep a cautious approach and we believe tapering is more likely in 2022 when the core PCE index will have made significant progress towards the objective of a sustainable increase to an average of 2% or higher.
Commentary from two regional Fed presidents, Robert Kaplan (Dallas) and Raphael Bostic (Atlanta), has led to market speculation that the Fed might reduce its bond purchases sooner than anticipated. In response, members of the Governing Council sought to allay any concerns that the Fed may soon taper its bond purchase programme. What is our view?