Federal Reserve (FED) officials will meet later on today for their first policy meeting since opening the door to possible tighter measures in the foreseeable future. 

As part of its response to the pandemic, the FED has been buying a cumulative total of at least $120 billion a month worth of treasury ($80 billion) and mortgage-backed securities ($40 billion). These accommodative moves helped bring down borrowing rates to their lowest levels ever, with mortgage rates sinking to historic lows and fuelling a re-finance boom - a crucial stimulus at a time when the financial system was being highly impacted by the coronavirus crisis.

However, the US central bank surprised investors last month with the issuance of individual interest rate projections, which indicated the possibility of two interest rate increases in 2023, up from zero just three months earlier. 

The question, however, is the timing of the possible tightening measures, particularly as mounting concerns vis-à-vis the contagious COVID-19 delta variant are posing a significant threat to the global economic growth outlook and the ensuing recovery. Moreover, and this has been the debate for the past months, the inflation figures reported to date are a combination of the base effect and supply disruptions. Thus, tightening measures will be highly dependent on consumer driven inflation, rather than conditioned by other measures.

Today’s meeting will possibly shed more light of the Fed’s intentions and if any has changed from its last meeting. Undoubtedly, ‘tapering’ will be the FED’s first possible step towards withdrawing the overwhelming accommodative measures it adopted in the wake of the pandemic. Nonetheless, the timing of when this should occur is aligned to a fine thread, as this can destabilise economic recovery. 

In economic terms, tapering refers to the reduction of the rate at which a central bank accumulates new assets on its balance sheet under a policy of quantitative easing (QE). More specifically, tapering is the first step in the process of either winding down, or completely withdrawing from, this sort of monetary stimulus program that has already been executed.

Surprisingly, the US economy has rebounded much more sharply than officials had anticipated just in December, with policymakers upgrading their growth forecasts by nearly 3 per centage points over the past seven months. To this extent, this gives the FED more impetus to withdraw support and gradually start shifting its monetary policy stance.

On the other hand, as said inflation concerns remain, however other elements might now have taken priority – case in point the global increase in cases brought about by the delta variant. The main concern remains whether the predicted economic rebound following the pandemic shock may have peaked, and thus global economic growth might succumb to the increase in cases. 

Despite the speedy vaccinations program, the Delta variant has reignited fears that forceful restrictive measures might be implemented going forward. This in turn would once again push the global economy towards an uneasy economic situation, at a time when huge amounts of debt were piled in order to combat the pandemic. This time round the support by both fiscal and monetary politicians might be conditioned by the lack of ability to once again support the global economy. 

In the face of increased market volatility, investors will want to adopt and maintain a long-term horizon and ensure a strong dree of diversification within their investment portfolio. As the FED will possibly release further direction on its intentions and also as the ongoing delta variant situation evolves, more periods of increased market volatility could possibly be on the horizon, whereby in both cases, diversification is key. 

Disclaimer: This article was issued by Andrew Fenech, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.