According to UBS Global Wealth Management’s Kelvin Taylor, the Federal Reserve has been slow to reduce the balance sheet. 

Jerome Powell, Fed chairman, stated Tuesday that he anticipates several interest rate increases this year. along with other reductions in the extraordinary help the central bank has provided during the pandemic. 

Take a step backwards, and listen to his words. He hasn’t actually acknowledged that the Federal Reserve is actually behind the curve — but they certainly are,” Tay told CNBC’s “Squawk Box Asia” on Wednesday. 

Tay pointed out that the U.S. stock market is doing well, and that corporate earnings were at multi-decade highs in the third and fourth quarters of last year.

They are printing at the moment. “So you might be asking why they still print at this level,” he explained. He also stated that the Fed will continue to shrink its balance sheet, which is one of the key development going forward.

Investors will be waiting for Wednesday’s inflation data, which is expected to provide an economic assessment and help determine Fed’s next move.

The U.S. central banking spooked investors last week after minutes of its December meeting Signaled members were available to tighten monetary policy more aggressively than previously expected.

It indicated it may be ready to start raising interest rates, dial back on its bond-buying program, and engage in high-level discussions about reducing holdings of Treasurys and mortgage-backed securities.

Tay suggested that the Fed might normalize the balance sheet sooner than anticipated to get ahead of the curve.

The Federal Reserve is likely to raise its interest rate in March, after tapering has ended. Now, the question is whether or not there are two to three increases in market interest. “It could be as many as four hikes in this year,” he stated.

His comments were not without complications. He also said there may be issues if supply chains pressures are lessening in the coming months. This would reduce inflation expectations for the future.

Tay stated that “That could mean the Federal Reserve might not need to begin normalizing the balance sheets as soon as we expect,” and added that the current situation remains fluid.

Tay also highlighted the Fed’s quicker policy tightening cycle as likely to have an effect on Asian countries, particularly emerging ones. 

He said that if the U.S. Treasury yields over a 10-year period rise to between 2% and 2.5% then this will affect the yields in the region where government sovereigns are concerned. He said that this will have an impact on some economies in Asia due to their high debt levels.

2013 saw the Fed trigger a “Fed-to-Report” initiative. taper tantrumIt began to phase out its asset acquisition program. The panicked investors caused a bond sell-off that led to a surge in Treasury yields.

As a consequence, Asia’s emerging markets suffered sharp capital outflows, currency depreciation and forced central banks to raise interest rates in order to safeguard their capital accounts.

Tay suggested that aggressive Fed policies could slow Asia’s economic recovery.

At this time, that’s not what you want. He noted that many of these economies are still trying to recover from the Covid-19 epidemic at the moment.