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Will FED suggest an adjustment of the QE?

The two-day meeting of the American Fed begins tomorrow and will end with a press conference on Wednesday evening. While the central bank is not expected to plan for a change in monetary policy, which it has repeated several times, a possible adjustment of the quantitative easing (QE) program may be suggested. The ever-increasing tempo of the economy we could witness since the beginning of the year might lead to bond purchases not being so much needed in the upcoming months.
 

The economy confirms the market sentiment

The US economy has been booming since the beginning of the year, actually delivering what the markets had predicted over the past year. For the most part, expansion needs to be attributed to massive fiscal and monetary stimulus, which continues to drive economic growth and ensure a "V" -shaped economic recovery. Since the last FOMC meeting, new applications for unemployment benefits have fallen to their lowest levels since the start of the pandemic, and retail sales have grown the most in the last 10 months. Meanwhile, at least half of Americans have received the first dose of the covid-19 vaccine, easing the latest restrictions. The situation thus looks very good, which is the basis for rising prices.
 

How to slow down inflation?

Inflation rose well above 2% in March, and the bank continues to hold the view that it is willing to tolerate inflation above 2% in the long run. This means that threat of rates rising somewhere this year is not so probable. Interest rates are set at zero which should keep markets higher. It may be more interesting to watch how the quantitative easing (QE) program will develop further. The central bank now holds it at a monthly volume of $ 120 billion. This will most likely be the first instrument the bank will resort to if inflation continues to accelerate to 3%.

During the two-day meeting, we will look for indications as to whether it is not planned to reduce the rate of monthly asset purchases in the coming months. Jerome Powell's press conference on Wednesday can help. The bank is likely to want to stick to hawkish policies and tighten monetary policy when the economy is almost fully recovered and able to offer jobs to most people who lost it during the pandemic.
 

Chart: Inflation in USA (source: tradingeconomics.com)