Calvin Tay, an economist at UBS Global Wealth Management, said that judging by the yield curve of treasury bonds, the Fed is lagging behind in reducing its balance sheet.
Yesterday Fed Chairman Jerome Powell confirmed yesterday that this year is likely to be the year when the Fed normalizes its policy. He said that, in his opinion, the Fed will stop asset purchases in March, raise interest rates during 2022, and may also start reducing the balance sheet at the end of the year.
"In fact, Powell did not admit that the Fed is lagging behind in reducing its balance sheet, but they are lagging behind," Tay said, and added that the situation in the US stock market looks relatively good.
Tay noted that in the near future, all attention will be focused on how quickly and how much the Fed will reduce its balance sheet.
Now traders are waiting for key US inflation data for December. Analysts on average expect that the consumer price index in December increased by 7% year-on-year and by 0.4% compared to November. In November, consumer prices in the United States rose by 6.8% year-on-year, the fastest pace since 1982.
Tay noted that in order to stay ahead of the Treasury yield curve, the Fed may begin to normalize the balance earlier than is currently expected.
"Now the probability of a Fed rate hike in March is about 75%. But there remains uncertainty about whether the Fed will raise rates two or three times," Tay said, and warned that a faster tightening of the Fed's policy could negatively affect Asian countries, especially emerging markets in the region.