Market closely watching Fed’s dovish stand and likelihood of tax hikes: CIBC's Tal
Following the U.S. Federal Reserve’s decision to leave interest rates low for the foreseeable future last week, Chair Jerome Powell signalled that inflation was under control. One prominent Bay Street economist says: Think again.
“We cannot say 100 per cent that inflation is not an issue,” Benjamin Tal, deputy chief economist of CIBC World Markets Inc., explained in an interview Monday.
“The Fed does not know, and the market does not know. Now, the Fed is telling you that inflation is not an issue, but the Fed does not know.”
Tal described the main case scenario for inflation is a 2.5 to three per cent rise over the next few months, driven by high gasoline prices and a drag on consumer spending. However, he added that this rise will be temporary.
The thin line the Fed walks between keeping financial conditions accommodative for battered businesses during the pandemic and keeping a lid on inflation is a dynamic the markets are watching closely, Tal said.
“The Fed is playing a very interesting game here. They have two options: one is to discuss inflation and spook the bond market and the stock market, or say that inflation is under control and don’t lose any sleep over it.”
Powell also stated that the U.S. central bank wouldn’t raise interest rates until the global pandemic subsides and the U.S. economy is in the clear. However, Tal also warned rates could run the risk of remaining too low for too long and let inflation run rampant.
“Clearly, this is a risky game that they’re playing, although I don’t know if they have any other choice,” he said.