Federal Reserve: Market Participants Anticipate Monetary Policy Changes
As market participants gauge current economic growth and inflation trends, the clamor for the Fed to initiate steps towards easing its monetary policy is increasing. The expectation arises largely due to the increasing inflationary pressures and the monetary policymakers’ commitment to ensure sustainable economic expansion.
Under normal circumstances, the dynamic interplay between economic growth and inflation determine the Fed’s stance towards the economy. The current circumstances, however, are far from normal due to the pandemic-induced global economic disruptions.
Economic specialists, therefore, envisage the Federal Reserve will start tapering its bond-buying program in the forthcoming months to control rising inflation rates that are currently exceeding its 2% threshold. The $120 billion monthly bond purchases aim to stimulate the economy, but market experts predict a continuance of these measures could cause price levels to accelerate, pushing inflation further.
The Federal Reserve has repeatedly emphasized their commitment to a patient policy response. The policymakers articulate that they’re open to policy adjustments according to economic indicators. They reassure individuals that they are ready to respond effectively to signs of an overheating economy. Overheating of the economy manifests as escalating inflation rates and undesirable public borrowing, leading to destabilization of the financial markets.
A large school of thought believes the Federal Reserve will start tapering its asset purchase program not immediately but in response to a string of sustained inflation outcomes over its desired margin. Essentially, the Fed is employing an average inflation targeting strategy, wherein they tolerate periods of moderately higher inflation.
Yet, financial markets are becoming increasingly concerned about the potential negative consequences of high inflation. Many speculate that if a decision to taper isn’t made soon, it might be too late to prevent inflation from deeply affecting the economy.
Creating a reassuring environment for market participants during these challenging economic times is of utmost importance. It will highly depend on the Fed’s transparency in articulating its policy responses, to not only the current economic indicators but also the potential future trajectories of inflation and GDP growth.
The key things that market participants are hoping to hear about from the policy makers are clear signals of their readiness to start tapering and their strategy in managing the timing and pace of tapering. Though the markets are clamoring for more clarity and faster action, the Federal Reserve continues to advocate its current stance of patience in managing inflationary pressures.
Just as it is critically important for market participants to understand the Fed’s stance on monetary policy, the Federal Reserve must also validate their concerns. The upcoming August Jackson Hole meeting is a highly anticipated platform where top economic decision makers are expected to discuss and outline their monetary strategies.
As the Federal Reserve continues to navigate these uncertain times, an informed, timely and balanced policy response is key to sustainable economic recovery and stability. It’s a fine line to tread where on one hand they face the pressure to control inflation and on the other hand, they need to continue encouraging economic growth.