US Should Cautiously Scale Back Quantitative Easing Based on Pricing Trends

The Federal Reserve has decided to normalize the unusual quantitative easing measures that have been applied to the COVID-19 disaster. The Fed should proceed with caution and keep an eye on economic trends.

The Fed will begin scaling back its quantitative easing program, which has been pumping large amounts of money into the market to stimulate the economy, by the end of the month.

Quantitative easing is expected to end around June 2022.

In March 2020, the Fed initiated a de facto zero interest rate policy and quantitative easing in response to COVID-19.

In addition to boosting stock prices, this also helped companies raise funds and restored the gross domestic product during the April-June 2021 period to pre-COVID-19 levels. The move seems to have been effective in boosting the economy.

In the U.S., however, prices have been rising sharply since the spring. This is mainly due to constraints caused by disruption in the supply chain, shortages of semiconductors and the fact that people have avoided work out of fear of infection. The year-on-year growth rate of the consumer price index was in the 5% range for five consecutive months through September.

If quantitative easing continues, there is a risk that inflation will accelerate further. A reduction in quantitative easing is appropriate.

The focus now will be on the timing of interest rate hikes. The market expects the Fed to raise interest rates twice in 2021 in order to keep inflation under control.

However, the U.S. growth rate slowed down in the July-September period due to supply constraints. The interest rate hikes are meant to deter the economy from overheating, and the economy could stall if the timing is wrong.

The U.S. stock market is at an all-time high due to the easing measures. Any policy change that challenges expectations could cause confusion in the financial markets.

Fed Chair Jerome Powell believes that price hikes will be temporary, and has indicated he is in no rush to raise interest rates. It is essential for the Fed to manage its policy with an eye on the economy and to carefully provide information.

While the U.S. interest rate hike and the resulting appreciation of the dollar are expected, consumer prices in Japan have not risen, and monetary easing is expected to continue. As a result, the yen is weakening and the dollar is appreciating.

While a weaker yen improves the performance of exporters, it also leads to higher import prices, including prices for crude oil, and increased costs for domestic demand companies such as those in the transportation industry. With the economy in the doldrums, it is difficult to pass on price hikes to consumers; there are concerns that these costs will be passed on to subcontractors.

Excessive depreciation of the yen also has a downside. The government and the Bank of Japan should closely monitor the impact of the Fed’s policy shift.