The US Federal Reserve accelerates the pace of the withdrawal of stimuli and plans to raise interest rates in 2022

Jerome Powell, chairman of the Federal Reserve, in a Senate appearance last September.POOL (Reuters)

The US Federal Reserve (Fed, central bank) accelerates its stimulus withdrawal plans driven by a situation in which high inflation and a low unemployment rate are combined.

At the last monetary policy committee meeting of the year, the Fed announced a faster-than-expected disconnection, bringing a

forward to March 2022.

(withdrawal of stimuli) that was scheduled to conclude in June. Although for the moment they remain at around 0%, the issuing bank has also confirmed its plans to increase interest rates, the main tool in the fight against inflation, with three adjustments next year - the first probably in the first quarter- and another three the next. The decision has been made "in light of the evolution of inflation and the further improvement in the labor market." The dollar appreciated as soon as the conclusions of the meeting were known.

Regarding the macroeconomic forecasts in year I of the recovery from the pandemic - a relative recovery due to the surprise factor of the omicron variant - the committee has revised down the growth estimates. Those announced in September contemplated a rise in GDP of 5.9% and an inflation rate of 4.2% for the end of this year, which has forced them to be adjusted to 5.5% in the case of GDP, four tenths less than in September, and 5.3% in inflation, one point more.

The Fed had been buying $ 120 billion a month in bonds to keep interest rates low since March 2020, the first peak of the pandemic in the US and the prologue to a short but sharp recession. In the last meeting of the year of the Federal Open Market Committee (FOMC, in English), which establishes the monetary policy of the Fed, the volume of disengagement, which in November was set at 15,000 million dollars per month, has multiplied by December for two, until reaching a rate of 30,000 million dollars less. Starting in January, the purchase will be 60,000 million a month.

In November the annual inflation rate reached 6.8%, the highest since 1982. At the end of that month, Jerome Powell, confirmed as head of the Fed by President Joe Biden, admitted that the warming of the economy could be longer than expected due to the appearance of the omicron variant of covid-19, which adds to the congestion of world trade and its effects on the Christmas season, in addition to an energy crisis. The persistent price pressure is substantiated by data such as the price that producers pay for supplies. Indicators published this Tuesday confirm an increase of 9.6% in November, in relation to the same month of 2020.

Raising interest rates is the most powerful tool in the Fed's hands to roll back inflation, because it would slow demand and growth as it seeps into the rest of the economy, raising the cost of borrowing from mortgages and commercial loans. A turn not so much Copernican, but pragmatic: the entity would go from a policy of keeping the economy afloat, with the Quantitative Easing (QE) automatic respirator, to another aimed at cooling it, keeping inflation under control. From prolonged admission to the ICU in a comatose economy, to treating an episode of persistent fever. “Since inflation has exceeded 2% for some time,the committee hopes that it is appropriate to maintain this target range [of the benchmark rate] until labor market conditions have reached levels consistent with full employment assessments, "the Fed said in a statement.

In a decisive week, with coincident meetings of the Fed, the Bank of England and the European Central Bank (ECB), many expected a coordinated action, to avoid the leap into the void of those who dared to take the first step, the rise of types. "We believe that the picture is clearer in front of the Fed," said on the eve of the meeting Gilles Moëc, chief economist at the fund manager AXA Investment Managers. "We hope that the institution announces a

faster than it will end early in the second quarter of 2022, creating a technical space to raise rates before the summer if necessary. In principle, the omicron variant should be cause for a pause, while the ongoing [covid] surge is far from over: hospitalizations have started to rise again in the US The footprint of November inflation, with another rise Significant pricing on key expenses like rents has probably solidified the central bank's determination to prepare for a preemptive tightening, even if we continue to think that the majority of the FOMC still expect inflation to slow significantly in 2022. "

Thus, the Fed has debated this Tuesday and Wednesday in Washington not the content, but the forms: when and how much the price of money will rise to keep the economy in equilibrium, in the midst of inflationary overheating. Interest rates around 0% (in the technical range between 0% and 0.25%) have been unchanged since March 2020.

Tightening monetary policy is today more risky than before, due to the indebtedness of the States as a result of the pandemic, underlines Philippe Waechter, head of Economic research at Ostrum. “The first reaction to the acceleration of the CPI is to tighten monetary policy, make it less accommodative. This strategy is more complex to apply today than in the past. The first reason is that most of the players in the economy are heavily in debt. This is the case, in particular, of the States that saw their indebtedness increase sharply during the pandemic. Reversing the monetary strategy is putting economic normalization at risk as long as the health crisis has not ended ”.

“All central banks have made the rate hike conditional on the end of quantitative easing [QE].

Therefore, in the current economic phase it is impossible for them to raise interest rates in a preventive way ”, hence the withdrawal of QE accelerates, Waetcher emphasizes.