The focus of attention is gradually shifting again to the US recovery, away from the impact of the second and third wave of the pandemic. While growth is happening in the US, and the improvements in employment are good, the job gains are not entirely matching up to the estimates or expectations. With major spends including payments directly into people’s hands, and a major infrastructure plan which is in the works, it is less likely that secondary parameters like employment is not going to accelerate sooner than later. In the last few weeks, there have been statements from several Fed officials which sounded like they are preparing the markets for a tapering off the bond buying program. This may be initiated by reducing the quantum of buying or the frequency.
There is a strong speculation that the Fed is probably at the discussion or planning stage to reduce the liquidity in the system given the recent retail inflation numbers. This is amidst the repeated assurances from the Fed that they would remain accommodative till the economy stabilizes and growth revives sustainably. The statement from the Treasury Secretary, Janet Yellen, who was herself the Fed Chair for some time, that higher interest rates are good for the US economy, has not confused anyone in the least but confirmed the thinking that rates could start rising now. Central banks prepare the markets at crucial points in time. The more interesting aspect of all this is that the US Ten Year Benchmark is trading at 1.55 % level, much lower than where it was a month back. With fast-paced vaccination drive and a high coverage, and the output gap being bridged to almost 98 % of the pre pandemic level, it is scarcely a miracle that the economy is set to grow, and output and employment too. Those who are familiar with the numbers know this too well. The FOMC meeting is a few days away.
The EU too has come out with a statement after their last meeting which was a couple of weeks back that there is strong bounce back after the pandemic, and that there will be stronger growth than what was estimated earlier. The growth forecast has been revised from 3.70 % to 4.20 % for the current year, and for the coming year it is estimated at 4.40 %. This upward revision of numbers is in consonance with the substantial improvements at the ground level in the EU member countries. The massive spends by the EU countries, is finally showing its positive impact, despite the rise in fiscal deficit beyond the 3 % norm. But it is not without inflation that this improvement is happening. Retail inflation is expected to rise from 0.70 % in 2020 to about 1.90 % in 2021. Though it may moderate in 2022, this surge in the price level may present some challenges going forward. With the achievement of a high percentage of vaccinations, and fiscal measures intended to spur both consumption and investment spending, the UK economy too is reviving quite fast.
