Fed: US Federal Reserve advises on speeding up bond purchases

Created: 12/15/2021 Updated: 12/15/2021, 3:38 PM

In the Corona crisis, the US Federal Reserve gave the economy massive support.

The economy is now booming, the labor market is recovering and inflation is very high.

Now the Fed wants to take countermeasures.

Washington - In view of a high inflation rate and solid economic growth, the US Federal Reserve is advising on a faster exit from its aid programs to deal with the Corona crisis.

Experts anticipate that the Federal Reserve (Fed) will curb its economic asset purchases faster than last announced.

The decision will be announced on Wednesday (8:00 p.m. CET) after the Central Bank Council meeting.

With the program, the Fed is pumping additional money into the financial markets to keep lending rates low and stimulate the economy.

Fed Chairman Jerome Powell recently announced in the Senate that the program could end “maybe a few months early”.

For this reason, securities purchases are expected to slow down more quickly.

However, the Fed is likely to hold onto the key interest rate, which is in the extremely low range of 0.0 to 0.25 percent, for the time being.

Powell will explain the Federal Reserve's decisions to the press on Wednesday (8:30 p.m. CET).

Possible increase in the key rate

The Fed had already announced in November that it would reduce bond purchases from USD 120 billion a month to an initial USD 105 billion - with the program scheduled to expire in mid-2022. This is considered a preliminary stage for possible increases in the key interest rate.

Higher interest rates would dampen the recently very high rate of inflation, but also slow down the growth of the world's largest economy.

Financial markets are also eagerly awaiting the updated Fed forecasts on the development of the economy, the inflation rate and interest rates in the US from the meeting of the Central Bank Council.

Analysts expect the forecasts to signal an earlier and stronger hike in the key interest rate.

The first interest rate hikes could therefore possibly take place as early as mid-2022.

The economy in the USA is growing rapidly after the Corona dent last year.

In its last forecast from September, the Fed anticipated economic growth of 5.9 percent for this year.

An increase of 3.8 percent was expected for 2022.

The unemployment rate fell to 4.2 percent in November, reflecting the ongoing recovery in the labor market.

Many companies already complain of a shortage of workers.

Before the pandemic, the unemployment rate was 3.5 percent - the lowest level in decades.

Highest inflation in decades

The inflation rate in November compared to the previous year was 6.8 percent, the highest level in almost four decades.

Experts blame the rapid growth, higher energy prices, market distortions as a result of the pandemic and problems in global supply chains for the persistently high rate of inflation.

Critics of US President Joe Biden also blame the government's extensive stimulus packages for the rise in inflation.

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US Federal Reserve cuts crisis aid - interest rates remain low

Until recently, the Fed had classified high inflation as a temporary phenomenon after the corona crisis.

In the meantime, Fed Chairman Powell admits that prices are likely to rise significantly well into next year.

This is a problem for the Fed because it is actually aiming for an average inflation rate of two percent.

In view of the robust economy and price increases, the International Monetary Fund (IMF) recently recommended that the Fed tighten its loose monetary policy.

It would be "appropriate" to curb bond purchases faster and pave the way for the key interest rate to be raised earlier than previously planned, it said.

Read more about the powerful US Federal Reserve here.

dpa