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Fed's Bullard Says Time Is Right to Scale Back Stimulus; Bitcoin Unmoved

The Fed's taper talk presents downside risk to liquidity-addicted financial markets.

Jul 13, 2021 at 10:58 a.m. UTC
Updated Sep 14, 2021 at 1:24 p.m. UTC

The U.S. economy is ready for a gradual unwinding of the central bank's liquidity-boosting bond purchase program launched a year ago, according to Federal Reserve Bank of St. Louis President James Bullard.

"I think with the economy growing at 7% and the [coronavirus] pandemic coming under better and better control, I think the time is right to pull back emergency measures," Bullard told The Wall Street Journal in an interview on Monday, adding that continued purchases risk overheating the housing market. "I am a little bit concerned that we’re feeding into an incipient housing bubble," he said. 

The Federal Reserve has been buying bonds worth $120 billion a month ever since financial markets crashed in March 2020 on fears of coronavirus-induced recession. The unprecedented stimulus triggered risk-taking across all corners of the global financial market, including bitcoin. The leading cryptocurrency charted a sixfold rally to over $60,000 from October 2020 to April 2021.

Taper talk, therefore, is considered bearish for the cryptocurrency. However, bitcoin is barely moving on Bullard's comments, published by WSJ a few minutes before press time, and continues to trade lackluster near $33,200.

The policymaker has made similar comments in recent weeks, saying the impending unwinding of stimulus may not be on autopilot like the taper exercise conducted in 2014.

While the policymaker revealed his taper bias on Monday, he assured that the central bank would be extra careful while pulling back stimulus. "We do want to do it gently and carefully, but I think we’re in a very good position to start a taper. I don’t need to get going tomorrow, but I think we’re in very good shape for this once the collective membership of the (rate-setting) Federal Open Market Committee is ready to act," Bullard said.

The Fed surprised markets last month by unexpectedly bringing forward the timing of the first interest rate hike to 2023. While the central bank has maintained that the recent rise in inflation could be transitory, economists surveyed by WSJ expect prices to remain sticky on the higher side for some time.

The U.S. consumer price index (CPI) report for June is due to be released on Tuesday. The data is expected to show the cost of living rose 4.9% year on year in June, following May's 5% rise, according to FXStreet. A big beat on expectations may strengthen taper fears putting downward pressure on liquidity-addicted financial markets.

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