November 18, 2021

James Bullard: Fed may accelerate monetary policy tightening

 Now there is a lot of talk on the topic: "What will the Fed do to contain inflation". In principle, there can be nothing else, since the situation in the markets and the economy is tense. Too many "bubbles" have inflated over the past year and a half. And many experts are waiting for them to start bursting. By the way, the first "bubble" could have already burst about a month and a half ago. The Chinese company Evergrande was on the verge of bankruptcy and has already escaped from it three times literally "in the last 5 minutes". However, many believe that it will still be declared bankrupt, and in this case, there will be risks of insolvency for its obligations, which amount to about 2 trillion yuan. The bankruptcy of Evergrande may lead to a wave of bankruptcies around the world, but so far this has not happened. Returning to the Fed. It is now expected to tighten monetary policy more quickly. Probably, against this background, the US currency continues to strengthen. Some experts expect that an increase in the pace of curtailing the QE program will be announced at the December meeting.


This idea is supported not only by economists and analysts but also by members of the Fed itself. For example, the head of the St. Louis Fed, James Bullard, said yesterday that the regulator should adhere to a more "hawkish" attitude in monetary policy issues. He noted that the Federal Reserve could increase the pace of QE curtailment to $30 billion per month and complete this program at the end of the first quarter of 2022. Another possible step of the regulator may be an increase in the key rate even before the completion of the QE curtailment. On the one hand, this step looks like an attempt to slow down with the gas pedal clamped down, but difficult times require difficult decisions. In addition, Bullard says, there may even be a reduction in the Fed's balance sheet by the end of the stimulus. According to the head of the St. Louis Fed, it makes sense to be tougher now to receive dividends in the next 18 months and take control of inflationary risks.


Thus, indeed, a decision may be made in December to tighten monetary policy, and this is no longer just talk. Recall that for stock indices, any tightening is a negative factor. So far, the tightening has only just begun, so there is no effect from it. However, the more the Fed reduces the volume of asset purchases and raises the rate (two increases are already being talked about in 2022 and a general increase to 3-4% in the future), the more outflow from the stock market will be observed, since an increase in the rate will lead to higher deposit rates, and capital gains can be obtained from safer investment instruments than stocks. If the stock market continues to grow by leaps and bounds, it will mean that the "bubble" continues to inflate.