WOOD Flash – EME Macro/Strategy: US – Fed on hold for now, but expect signals of tapering in the summer

The Fed has kept interest rates unchanged, as expected, but the tone of the new forecast was more hawkish than anticipated. That said, recently, we flagged that we will see more fiscal loosening, coupled with faster monetary consolidation in the US. We anticipate slow tapering starting from 2022E, while actual interest rate increases are probably off the table before 2023E. The pattern of US 10-year yields is discounting more than what is likely to materialise in terms of interest rate increases in the next 18 months. However, the combination of high fiscal stimulus and more widespread working from home reduces the negative impact of high energy prices on consumer spending, which probably is contributing to the Fed feeling comfortable with a mildly more hawkish tone.