The U.S. Federal Reserve will start tapering in the next two to six months, predicts BNY Mellon chief economist Richard Hoey in his new report, Seven Year Expansion.
Last week, Fed Chair Ben Bernanke surprised analysts by announcing that the central bank’s stimulus of the U.S. economy would continue indefinitely.
“We regard the Fed’s failure to start the taper as a leading indicator of a central bank, which will eventually end up behind the curve in its monetary policy, slowly building up the pressure for a major upward spike in interest rates in 2017 or 2018, following the presidential election of 2016,” says Hoey.
He expects global growth will speed up in 2014, outpacing the last two years. It will be driven by developed countries, which have eased their monetary policies.
Performance in emerging economies will be mixed, but Hoey states that fears of a developing market crisis appear overdone. Most of those markets will expand at moderate rates.
“We believe the U.S. economy has moved into the second half of what we expect will be seven consecutive years of economic expansion,” he says.
Growth should speed up in the U.S., too. He predicts three years of 3% real economic growth starting in 2014. Last year, the U.S. economy grew by 2%. The rise will be because government cutbacks will be mostly complete.
“The U.S. is not very inflation-prone, so monetary policy can remain stimulative,” Hoey explains. “The dovish stance of monetary policy was reinforced by the Fed’s recent decision to postpone the first taper of QE3.”
He also expects a three-phase rise in bond yields over five years. The first phase is an adjustment to free-market levels from artificially low bond yields, which reflect an artificial scarcity of bonds due to large scale bond purchases under QE3.
“This adjustment is underway, but in a choppy pattern, due to the Fed’s ‘Hamlet syndrome’ about beginning the tapering down of QE3,” adds Hoey. “To taper or not to taper? That is the question.”
A version of this article was originally published on our sister site, Advisor.ca.