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Fed Tapering? Here's Why It May Not Happen

The U.S. Federal Reserve's plan to taper its massive monthly bond buying program later this year may not materialize after all, says one strategist.

Viktor Shvets, head of Asian strategy at Macquarie Securities Group, said the U.S. economy is unlikely to improve enough to allow the Fed to stop pumping in liquidity.

"As long as inflation doesn't pick up... GDP [gross domestic product] growth rates [don't] get anywhere near 3-3.5 percent, [and] unemployment will not fall significantly below 6-6.5 percent ... you are not going to have any tapering," Shvets told CNBC on Friday.

(Read More: Buy Treasurys, as Bernanke's Tapering Is All Talk)

The U.S. first quarter GDP growth data, reported this week, proved more tepid than hoped at 1.8 percent, while the unemployment rate is around 7.6 percent and inflation is at a tame 1.4 percent.

According to Shvets inflation in the world's largest economy will not pick up for the next few years.

"So long as the velocity of money remains slow...the fact that the Fed is not adding to what it's buying means its already withdrawing effectively...there is not going to be any inflation at all. In fact deflation is a much more serious issue than inflation....all the wounds will heal but not this year, next year or the year after that," he added.

(Read More: Fed Tapering: It's About Time!)

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Hints from the Fed Chief Ben Bernanke that it may start winding down its $85 billion a month quantitative easing (QE) by end 2013 and altogether stop the stimulus in 2014 have sent financial markets into a free fall in recent weeks, with emerging markets being particularly hard hit.

However, some calm was restored after two Federal Reserve policymakers said Thursday that U.S. monetary stimulus would not be fading anytime soon. Their comments that market expectations were "out of sync" with Fed policy led the Dow Jones Industrial Average to triple digit gains.

(Read More: Fed'sDudley: QE Could Increase If Labor MarketDoesn't Improve)

Equity Markets in Asia were also higher Friday on cue, with the Japanese Nikkei gaining as much as much as 3.3 percent in early trade.

Shvets further argued that it would be too dangerous for the Fed to take away the punch bowl because the global economy as a whole is too highly leveraged.

Furthermore, if the Fed were to tighten monetary policy even slightly, other major central banks could step in to compensate, he added.

"Developed markets are leveraged four to one, emerging markets are now leveraged 2.5 to one - you cannot withdraw liquidity. If the Fed is going to withdraw anything it's going to be a minute amount and on top of that other central banks that will inject more liquidity will be Bank of England or the European Central Bank," he added.

(Watch This: Equity Markets Want QE Tapering: Pro)

Contact World Economy

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