Is 2021 going to end with a Central Bank Bang or a whimper?
Probably the easiest to call this week will be Wednesday’s FOMC meeting. With US inflation at a 40 year high of 6.8%, it would be a major shock if the Fed didn’t signal its intention to taper quickly. In doing so bringing an end to pumping money into the US economy. This would be a precursor to an increase in US interest rates.
The effect on the Dollar of this week’s FOMC meeting could be relatively small, as a quicker taper is mostly priced in, particularly after the dropping of the T-word on inflation. which as we all knew inflation was not going to be transitional.
However, the longer the Fed leaves interest rates unchanged the bigger the problems it faces and the resulting interest rate hikes.
On the other side of the Atlantic, inflation hit 6% in Germany, the old school BUBA members must be apoplectic in shock. However, the ECB will probably look to adjust the pace of stimulus by mid-2022, as EZ inflation is at 4.9% which is probably low enough for the ECB to kick the can down the road as wage inflation is benign.
Meanwhile, in London the Bank of England has more pressing inflationary problems, Wednesday’s CPI for November could well get close to 5%, which should get alarm bells ringing in Threadneedle Street.
The Bank of England’s MPC came under heavy criticism for not hiking rates after giving a fair amount of hawkish signals in the run-up of their November meeting. Is still likely to keep things unchanged again.
The clouds of covid lockdowns are gathering over the UK which will see the “Old Lady” be cautious despite the inflation risk.
In my opinion February looks to be my favourite for the first hike in a series of tightening moves in 2022 from the Bank of England. This is likely to be way ahead of the FOMC and ECB.
So with the FOMC priced in, the ECB unlikely to rock the market and the Bank of England not playing the Grinch, we might finish 2021 on bit of a whimper!
But at least 2022 looks like it could be more exciting as those inflationary chickens come home to roost.