The Federal Reserve has moved the timeline on when they expect to push interest rates higher. It had earlier expected to hold rates steady throughout 2023. But its median projections show the rate rising to 0.6 percent by the end of 2023.

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Experts believe it has less to do with rising inflation and more with America’s progress in curbing the infection rate.

“I think Fed is indicating that the downside risks to its outlook have diminished significantly with the increased vaccination as well as the reduced infection rate.

So they are getting a little bit more confident about their projections,” Steve Brice, Chief Investment Strategist at Standard Chartered Bank told CNBC-TV18 in an interview.

“Their projections haven’t changed materially, at least on the growth side, and they are getting more confident on those,” Brice said.

Fed increased GDP expectations from 6.5 percent to 7 percent on Wednesday. At the same time, it increased headline inflation expectations to 3.4 percent.

At the end of the FOMC Meet on Wednesday, Powell said, “Our expectation is these high inflation readings will now abate.”

But the higher inflation numbers bother Fed. In May, the US economy recorded an inflation reading of 5 percent – the highest in 12 years. If this continues, consumers will expect even higher inflation, igniting a self-fulfilling cycle.

Once the evidence of inflation becomes clear, Fed will have to interfere, sooner rather than later.

The first step will be to taper its massive bond-buying program. Ever since March 2020, the Fed spends $120 billion a month in buying treasury bills.

While Fed discussed 'eventually' cutting back on the asset-buying program in Wednesday meet, it did not give any indication of the timing of such a move.

Wall Street economists have their estimations though.

Andrew Hollenhorst of Citi expects a tapering announcement in September. “We continue to expect a taper announcement in September and with a $15 billion per month decrease in purchases as it purchases beginning in December,” he said.

Ellen Zentner of Morgan Stanley, on the contrary, expects the announcement to come in July. Followed by an official announcement in the December FOMC meeting and initiation in January 2022. Jan Hatzius of Goldman Sachs seconds Zenter's expectation on the date of the official announcement.

Michael Hanson of JPMorgan, however, says there is a risk of tapering to begin in December 2021.

“We continue to expect a hike in 2023 and look for tapering to start in Q1FY22 with a risk of December 2021. It would be fairly rushed to see tapering begin before December this year,” Hanson said.

Standard Chartered’s Brice estimates tapering to begin in the first quarter of FY22. But, all these conversations and estimations could lead to a little bit of market volatility. And this wouldn’t be unexpected.

When the Fed announced bond tapering in 2013, markets saw a fair bit of volatility. But the market rebounded six months after the program.

Not only volatility is not unexpected, but Brice also sees a buying opportunity for investors during that period.

“We have seen very strong equity rally for over 85 percent from the March lows. We haven’t seen more than 8 percent of pullback amongst that period of 15 months or so. Some sort of pullback or volatility is inevitable at some point and maybe welcome in the coming months.

But overall, the big picture hasn’t changed that much and we think that would be a buying opportunity for investors,” he added.

For the full interview, watch the accompanying video

(Edited by : Yashi Gupta)

First Published:Jun 17, 2021 5:11 PM IST