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19 May 2021

Econ Digest

The Fed may need to implement QE tapering ahead of schedule as US inflation surges above market forecast


          US inflation surged above market forecasts in April 2021: headline inflation rose 4.2%YoY while core inflation reached 3.0%YoY. Such increases were driven by improving domestic demand following accelerated vaccination efforts and continuous issuance of stimulus packages. On the other hand, supplies were threatened by shortages of goods and raw materials for manufacturing and rising commodity prices, especially fuel prices, which has led to a spike in inflation.

        Amid rising inflation, the Fed may be compelled to implement QE tapering sooner than anticipated. Nonetheless, the Fed will still focus more on economic recovery than inflationary pressures. While the labor market has recently begun to recover, unemployment numbers continue to be higher than pre-pandemic levels. The US unemployment rate stood at 6.1% in April 2021, with the number of unemployed people averaging 9.8 million. Therefore, the labor market may require a longer-than-expected period to reach the Fed's target for full economic recovery.

        Due to the rising inflation, the Fed will likely have to maintain relaxed monetary policy until at least year-end 2021. However, the Fed may resort to yield curve control in the near future in order to keep long-term bond yields from growing too rapidly. Even if the Fed can decrease medium- and long-term bond yields, it would still need to reverse its quantitative easing policy eventually once the US labor market nears full employment. This time around, the Fed's intervention may be short-lived, lasting only a few months, a stark contrast to 2011-2012 when the Fed conducted “Operation Twist" which lasted for years.

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Econ Digest