Facing the strong economy and inflation, will we see significant tapering soon?

My answer is No.
-- Tapering will not hit corporate profit hard and certainly not the job market and economy; In another word, the Fed’s continuously buying assets will not be helping the economy.
-- The Fed’s simultaneously raising O/N RRP rate and buying assets tells that extra liquidity is not expected in bank reserves and certainly not in real economy.
-- The Fed’s continuously buying assets is to lower government borrowing costs, boom stock & housing market, and do more unknown, and all of these missions are not done yet so far.

As our previously posted analyses indicate, corporate debt interest rate may be pushed up by only about 50 bps, if the Fed stops its monthly purchase of $80 billions today, which is a relatively small and neglectable impact and easily made up by the recovering economy, especially the improved sales prices. In another word, the role that the monthly purchase of $80 billions plays in lowering corporate costs and lifting hiring is insignificant.

The Fed’s O/N reverse repo has kept hitting its record for a couple of months accompanied with a RRP rate hike. One thing, implied for sure from the fact that the Fed keeps injecting money into the market while it keeps absorbing money from the market with its reverse repo facility, is that banks have not been loaning out more money into the real economy.

Since what the Fed really wants from its current asset purchase has not much to do with the real economy and job market, what triggers tapering will also have nothing to do with how the real economy and job market perform. And in such a loose monetary situation the Fed is confident in its interest rate tool to fight the economy’s overheating if it happens.

#economy #hiring #money