MNI INTERVIEW 2: Fed QE Length May Mean More Hikes-Ex-BOJ Exec

A former Bank of Japan executive director warned of the risk that U.S. asset prices boosted by prolonged quantitative easing (QE) will plunge due to expected rate hikes and quantitative tightening by the Fed.

"The Fed may need to implement more rate hikes" ... and “would need to move faster on QT (quantitative tightening), which in turn will have a big shock on financial markets," Hideo Hayakawa, also former BOJ chief economist and now senior fellow at the Tokyo Foundation for Policy Research told MNI, see: MNI STATE OF PLAY (RPT): Fed Pencils In March Hike, Readies QT.

"It is obvious that the U.S. economic pickup has been accelerating since April. Despite the accelerated economic recovery, the Fed continued to buy assets. As a result, asset prices have risen sharply,” Hayakawa said.

Hayakawa is among several former and current BOJ officials who have expressed concerns about the choices before the U.S. Federal Reserve to tamp down inflation. He noted the Fed asset purchases "played a big role in stabilising global financial markets" hit by the pandemic.

But "I don’t know if it was necessary for the Fed to continue to buy assets since last spring as the financial system was stable and its economic recovery accelerated."

"The pace of the U.S. long-term interest rate rise is slow," he said, and referred to the term ‘exorbitant privilege' of the U.S. dollar's dominant use in pricing global commodities and other goods. "When U.S. interest rates rise, it causes fund inflows from other countries," he said.