The Fed starts moving down the path

Where the Fed has telegraphed that it is gradually heading for the exit from its ultra-accommodative monetary policy, nothing is going to change at the ECB for the time being.

Perspectives edition 2021/07 (2021/06/30)

Clear & concise

  • The successful vaccination rollout is flanking a dynamic economic recovery;
  • The Delta variant may trigger a 4th wave but probably not any extensive lockdowns;
  • Inflationary pressure stands to remain high temporarily;
  • Unlike the ECB, the Fed has started down the path to unwinding its ultra-loose policy;
  • Despite rising interest rates, risk assets continue to offer potential.

Video: An espresso with Jürgen Michels


The three-tone chime created by a rising vaccination ratio, an accelerating economy and a higher inflation rate has also been perceptible during June. However, the Delta variant of the virus, which is proliferating strongly in some industrialised nations as well, makes it plain that the pandemic is not yet under control and is continuing to depress economic activity, above all in emerging economies. A fourth wave of Covid-19 is accordingly on the cards for Europe as well. On the upside, the high number of already vaccinated persons should limit the number of severe disease trajectories and should render overarching lockdowns (spelling economic damage) unnecessary to take pressure off health-care systems.

In response to US consumer-price inflation topping 5 percent in May and to the prospect that this may not even be the peak for the headline CPI, FOMC members at the Fed have signalled, by pencilling in higher “dot plot“ key-rate expectations, that the current ultra-accommodative monetary-policy alignment is not set in stone for eternity. This is the Fed’s first major step towards unwinding its unconventional policy, and financial markets have taken it on board without throwing a major tantrum. As a result, the next verbal steps should follow soon, probably in the mountain valley of Jackson Hole, leading to actual scaling-back of Fed bond buying (“tapering”) from November onwards. This too should be processed in a tantrum-free fashion by markets, but will presumably lead to higher US Treasury yields as well as to equity-market consolidation over the course of the autumn.

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