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UBS says Fed is behind schedule to cut balance sheet

The Federal Reserve is behind when it comes to reducing the balance sheet, according to Kelvin Tay of UBS Global Wealth Management.

Fed Chairman Jerome Powell said on Tuesday he expects a series of interest rate hikes this year, as well as further cuts in the extraordinary aid the central bank has provided during the pandemic.

“If you take a step back and listen to what he said. He didn’t actually recognize that the Federal Reserve is actually behind the curve – but they sure are,” Tay told “Squawk.” CNBC’s Box Asia ”Wednesday.

Tay noted that US stock markets are doing relatively well and that corporate profits in the second and third quarters of last year were also at “multi-decade highs.”

“And at this point they’re still printing. So you must be wondering why they’re still printing at this level, right?” sheet.

Investors await Wednesday’s key inflation data to assess the economic situation and the Fed’s next move.

The U.S. central bank scared investors last week after minutes from its December meeting indicated its members were prepared to tighten monetary policy more aggressively than expected.

He has indicated he may be ready to start raising interest rates, reverse his bond buying program and engage in high-level talks on reducing holdings of treasury bills and securities. mortgage backed.

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To get ahead, Tay said the Fed may start normalizing its balance sheet sooner than expected.

“There is a 75% chance that the Federal Reserve will increase in March at the end of the tapering. The debate now is whether it is two or three hikes when it comes to the market. It could also be four. increases this year, ”he said.

He added that there could be complications, especially if pressures on the supply chain ease over the next few months, as this could lower inflation expectations going forward.

“This means that the Federal Reserve may not have to start normalizing its balance sheet as soon as expected,” Tay explained, adding that the situation at this point remains fluid.

Tay also pointed out that the Fed’s faster political tightening cycle is likely to impact Asian countries, especially emerging markets in the region.

“If your US Treasury yields on a 10-year basis go up to around 2% and 2.5%, then the yields in that part of the world where sovereign governments are concerned will have to behave accordingly,” he said. -he declares. This will affect some Asian economies given their higher debt levels, he added.

In 2013, the Fed triggered a so-called tap tantrum when it began to end its asset purchase program. Investors panicked and it sparked a massive bond selloff, causing Treasury yields to soar.

As a result, emerging markets in Asia suffered large capital outflows and currency depreciation, forcing the region’s central banks to raise interest rates to protect their capital accounts.

Tay said the Fed’s aggressive policies could potentially slow the economic recovery in Asia.

“It’s not something you want at this point. Because at this point many economies here are still struggling to recover from the Covid-19 pandemic,” he noted.

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