US economy is showing signs of accelerated recovery, going by the impressive economic data in recent months. An aggressive vaccination campaign is a catalyst behind the economy’s opening and the easing of lockdown restrictions that had curtailed economic activities last year. Amid the ongoing recovery, the Federal Reserve is not looking to roll back some of its monetary policies any time soon.
Easing Monetary Policy
FED chair Jerome Powell has made it clear that a rollback of the $120 billion a month bond purchase will only come into effect once the economy is fully healed. Likewise, interest rate hikes are not expected anytime soon. Rate hikes will only be considered once the economy has fully recovered.
Massive stimulus packages at the back of a string of monetary policies have been the catalysts behind US economic recovery. The cutting of interest rates to record lows all but lowered borrowing costs, conversely helping the support the economy on the liquidity front.
The rising of yields to 14-month highs in recent months has affirmed that the US economy is on a recovery path. However, the FED has refrained from hiking interest rates on fears such a move will have a negative impact on the economy.
Rising Inflation and Yield
The decision on when the FED can start reducing monthly purchases depends on the impact of the COVID-19 vaccination drive. Should the pandemic situation worsen, then it is highly unlikely the FED will roll back any of the policies in place.
However, a cloud of skepticism hangs in the balance on whether the FED could wait much longer. Rising inflation amid rising yields calls for immediate attention from the FED. The risk of higher inflation has been skyrocketing, all but raising serious concerns.
Rising inflation and yield have taken a significant toll on the markets. Tech stocks have pulled lower on yields rallying to 14-month higher. The pullback has come amid valuation concerns on investors shifting their attention to cyclical. Sectors such as financials, industrials and energy have gained significantly amid prospects of the FED raising interest rates.