Sticky inflation to force US Fed to increase pace of tapering?

The US Federal Reserve’s two-day policy meeting is underway, and policy corridors are abuzz with speculations of speeding up of the tapering programme.
As per Wall Street economists, the US Fed may announce that the central bank will accelerate the pace of tapering asset purchases and prepare for raising interest rates in 2022 due to the growing risk of persistent higher inflation.
Further, they expect the Fed to announce a $30 billion reduction in asset purchases, starting in January 2022, doubling the pace two months prior and aiming for ending asset purchases in March 2022.

Chris Wood, who is global head of equity strategy at Jefferies, for instance, recently said that the latest US payroll data confirmed expectations of accelerated tapering.
Moreover, if the end of the tapering is brought forward to March, it would also mean that there could be three rate hikes in 2022, he said.

Echoing similar views Philip Marey, senior US strategist at Rabobank International, expects two rate hikes in 2022 given US Fed chair Jerome Powell’s apparent shift to inflation fighting, and assumption that the negative impact of Omicron on the US economy remains limited.

Given that Fed Chairman Jerome Powell recently said that it was appropriate to consider wrapping up the central bank’s taper of asset purchases “a few months sooner” as the risk of higher inflation has increased, the timeline for the same is something that the market participants will keenly track.
Remember, a tighter monetary policy by developed countries like the US can disrupt world asset markets and fall particularly hard on developing countries like India where rising dollar costs would be painful.

Apart from the US Fed meeting’s outcome due later today, investors will also gear up for policy meetings by other central banks, including Bank of England and European Central Bank.
Besides, global mood amid Omicron concerns will further sway the markets.
Back home, shares of NBFCs will be in focus today after the Reserve Bank of India decided to bring the non-banking finance companies under its ambit of PCA – or Prompt Corrective Action – framework effective October 1, 2022.
Meanwhile, primary market action will take centre stage amid three active IPOs.
The initial share sale of MedPlus Health will enter its last day today, while that of Data Patterns will enter second day.
Lastly, the Rs 126-crore IPO by HP Adhesives will open today in a price band of Rs 262-274 per share.
The proceeds of the IPO will be utilised towards working capital requirements and capacity expansion.

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