William De Vijlder - Reuters TV June 26 - TradinVincent McAviney:

Ahead of the Fed announcement, our guest today is William De Vijlder, Group Chief Economist at BNP Paribas. William, thanks for joining us. What are you expecting the Fed to say and do today, especially given yesterday’s inflation data in the States and today’s in the UK?

William De Vijlder:

Well, what would I expect is at least they start talking about tapering. And now, a lot will depend in terms of the information we get from the questions that will be asked in the press conference. The Fed is in no hurry at all to give any indication that it is contemplating seriously scaling back the asset purchases. This is something we expect to happen- the scaling back- early on next year. So, there’s still a bit of time because they want to see how the data unfold. The data that we have seen very recently were very much biased. It’s very concentrated. And we will have a better picture of the underlying inflation dynamics as we get into the fall. And that would, again, be the right time to announce that they will be tapering.

Vincent McAviney:

And given past and present inability by economists to predict inflation, why should we believe the Fed when it tells everything is under control?

William De Vijlder:

In theory, what the Fed says makes perfect sense and I share that view – the insistence of the output gap, the insistence on anchoring inflation expectations, the role of base effects and so on. But what we do not know in an economy which is restarting so abruptly is whether there will be a temptation on behalf of companies to raise prices. If you look at the UK data this morning, the inflation was moving up in the areas that were benefiting from the reopening of the economy.  And why, because the price elasticity is fairly low. People are keen to go out to restaurants and that gives them opportunity to charge higher prices. What it means is that the temporary increase in inflation could be a bit longer-lasting and be a source for nervousness for bull markets.

Vincent McAviney:

And in your opinion, is it even possible to scale back bond-buying without another taper tantrum?

William De Vijlder:

Yes. First of all, when the ECB announced that it was going to stop its quantitative easing a couple of years ago, that went fairly smoothly. I think the Federal Reserve has also learned a lot from the taper tantrum that was triggered in May 2013 by Ben Bernanke. There is so much talk about sending signals and what have you. What else to expect, however, is that markets and the Fed are just working on the same thing, the same data. And that means that when the Fed will start to talk about tapering, the market will already have incorporated that decision to some degree in the form of a further steepening of the yield curve.