Dallas Fed President Robert Kaplan, who has the right to vote on the FOMC in 2023, said on April 30 that “it is appropriate to start talking about adjusting the pace of QE purchases now, and I am concerned about the excesses (of investment) and imbalances in the U.S. market.
He warned that there are excesses and imbalances in the U.S. financial markets, i.e., the stock market remains high, credit spreads are falling rather than rising, and the housing market, which is considered strong by historical standards, “has a real excess in the U.S. housing market.
Concerned about potential leverage and excessive risk-taking in the non-bank financial system, he believes the Fed “should start talking about tapering bond purchases sooner rather than later” and “my view remains unchanged that interest rate increases should begin in 2022.
He now believes that the U.S. economy to reach the Fed set the preconditions for reducing bond purchases earlier than expected, inflation is expected to rise to 2.5% or more than 2.75% in the next few months, “leading to rising inflation factors include base effects, supply and demand imbalances and fiscal policy”.
Kaplan also said that he was watching the state of the new crown vaccination outside the United States, and pessimistic that if the global economic growth slowdown will eventually be transmitted to the United States, so that the U.S. economic growth weakened more deeply than expected.
The analysis points out that this is the first time since the Fed’s April FOMC rate policy meeting that a Fed official has suggested starting discussions on adjusting QE.
Three weeks ago on April 9, Kaplan also said that it would push the Fed to reduce support for the economy sooner rather than later, and if progress is made in employment and 2% inflation, he would advocate withdrawing some of the Fed’s unconventional moves, starting with scaling back bond purchases.
After today’s speech, medium and long-term U.S. bond yields were short-lived lower. 10-year benchmark U.S. bond yields were short-lived down more than 1 basis point and turned lower overall during the day, temporarily at 1.6312%, approaching the daily low of 1.6294% recorded before the U.S. stock market.
The 30-year U.S. bond yield briefly retreated nearly 2 basis points to test the 2.3% mark, approaching the daily low of 2.2982% recorded by European stocks earlier in the session. Two-year yields fell less than 0.2 basis points to a provisional 0.1604%, with overall intra-day volatility of about 0.8 basis points.
U.S. stocks extended their collective losses, with the Dow down more than 200 points and the Nasdaq turning lower. The dollar index refreshed its daily high and was back above 91 at 91.034, up 0.42% intraday. The British pound fell about 30 points against the dollar in the short term, refreshing its daily low to 1.3845, down 0.67% on the day.
St. Louis Fed President James Bullard (James Bullard) had said on April 12, when the vaccination rate reached 75% or even 80%, the issue of QE tapering can be discussed. This is the first time the Fed executives talk about tapering QE, meaning that the big release of underwater global asset prices may have entered the second half of the carnival.
And Fed Chairman Jerome Powell said at a press conference on Wednesday that it is not the right time to communicate about tapering, and that a temporary uptick in inflation does not guarantee a rate hike. He focused on the “economy is a long way from further progress”, when the time is right, the Fed will reduce the speed of purchases of mortgage-backed securities (MBS), but not now.
This seems to suggest that the rest of this year’s FOMC meeting will usher in a divergence of views among officials. As previously mentioned by Wall Street News, a Bloomberg survey said that more than two-thirds of surveyed economists expect the Fed to issue an early warning signal to scale back its bond purchases this year.
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