Posted on Dec 15, 2019 2021 at 20:33Updated Dec 15, 2019 2021 at 20:47
The Fed formalizes its policy change. The US Federal Reserve, as expected, left its rates unchanged but announced on Wednesday the accelerated reduction in its asset repurchases. From January, it will double the rate of this reduction. With this measure, Jerome Powell shows his determination to fight the inflation that has taken hold in the United States. “Tapering”, as monetary policy experts call it, is a prerequisite for a rise in interest rates, which is expected from next year.
At his press conference, Jerome Powell declined to comment on the timing of a rate hike. But the time between the end of asset buybacks, scheduled for March, and the rise in rates should be short. “Today, the economy is so strong, we are close to full employment. We will make the decision at the next meetings, but there is no need to wait long, ”he said.
At the height of the crisis, the Fed decided to intervene in the markets to ensure the proper functioning of the debt market. It repurchased up to $ 120 billion in securities per month. At its November meeting, the Monetary Policy Committee decided to lower its asset repurchases by $ 15 billion per month.
Two to three increases in 2022?
The Fed has clearly switched to a less accommodative policy. While no consensus has emerged so far on a rate hike in 2022, the monetary policy committee is now moving towards three hikes next year. All governors are forecasting at least one hike.
Persistent inflation is at the root of this paradigm shift. “With the rise in prices, the economy no longer needs additional support,” said Jerome Powell. Two weeks ago, during a hearing in the Senate, the president of the Fed had already recognized that the phenomenon should no longer be considered as transitory. “Clearly, the risk of persistent inflation has increased”, had dropped the president of the Fed, renewed by Joe Biden in his post for four years, in front of the senators. Before adding: “The factors pushing inflation up will hold for much of next year. “
Inflation sets in
The Fed took note of the news on inflation, as prices soared again in November. The consumer price index rose 0.8% over the month, bringing inflation to 6.8% year-on-year, a record for forty years. In October, the annual increase had already reached 6.2%.
Fed economists have raised their forecasts for inflation. They now expect prices to rise 5.3% in 2021 and 2.6% in 2022. They have also lowered their growth forecasts, to 5.5% in 2021 and 4% in 2022.
If the rate hike is confirmed next year, the Fed will then be able to tackle a new project: the reduction of its balance sheet. With the pandemic, it has more than doubled to reach $ 8,700 billion.