Tapering Is Almost Here, But Markets Couldn’t Care Less

The Fed’s statement said that it will begin reducing its asset purchases very soon and may even end the tapering by mid-2022. Policy rate hikes, however, will not occur until 2023, the so-called dot plot, which is used by the Fed to indicate its outlook for interest rates routing, indicates.

It follows statements from Federal Reserve Chairman Jerome Powell at the Jackson Hole symposium last month, where he first indicated an early taper.

On Wednesday, Powell said there is merit in reducing asset purchases as soon as the threshold conditions for the same are met.

What’s more, the Fed will reduce its housing, even though it expects US gross domestic product (GDP) growth to fall by a wide margin and inflation to exceed previous projections.

While these may sound ominous for markets affected by dollar liquidity, investors are taking comfort from two factors. One, the liquidity of the dollar in global financial markets is unlikely to diminish anytime soon. This means that recent foreign fund inflows into domestic equities may not decrease. Foreign portfolio investors have invested $2.89 billion in domestic equity and bond markets so far this month. Since January, inflows have increased to $12 billion. Second, the rate hike is much slower than the taper.

“The bottom line here is that tapering is imminent, but (I) expect chair Powell to push back on the timing of rate lift-off, emphasizing uncertainty and potentially emphasizing his view that the rise in inflation is transitory. Will prove,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in an emailed response.

“Ultra-low interest rates will remain in place until at least 2023, and Powell’s comments indicate the Fed will not raise rates too quickly. This bodes well for equity valuations in emerging markets.”

The lack of Tantrum can be attributed to Powell’s careful communication, which has been preparing the market to taper off for some time now. But perhaps the relatively optimistic reaction of the markets to the Fed’s statement warrants caution.

Here, signs that China was ready to soften Evergrande’s impact on financial markets by using some short-term liquidity seem to have calmed nerves as well. But Evergrande is an emerging situation and there are signs of trouble for lack of demand from China.

However, analysts at Nomura say that the impact on India from China’s slowdown or even financial turmoil will be less than that of other Asian peers. The firm said in a report, “Our analysis shows that Australia, Singapore and Malaysia will be most affected by slowing demand from China (the real channel), while Hong Kong, Singapore (again), Taiwan and Korea appear through the financial channel. will be affected the most.” .

“As such, even if asset markets stabilize, economies exposed through the real channel may face headwinds in the medium term, given our China team’s view that the economic slowdown will worsen.” The Fed indicated that the risk from Evergrande seemed manageable immediately.