US Federal Reserve tightens monetary policy

Created: 12/15/2021 Updated: 12/15/2021, 9:39 PM

The US Federal Reserve in Washington.

© Liu Jie / XinHua / dpa

In view of the high inflation, the Fed is accelerating the exit from extremely loose monetary policy.

Programs to support the economy are ended.

Washington - The US Federal Reserve is accelerating its turnaround from aid programs to deal with the corona crisis to tighter monetary policy to combat high inflation.

The Federal Reserve (Fed) announced on Wednesday that it would curb its economic asset purchases faster than last announced.

In addition, the central bankers signaled several increases in the key interest rate for 2022 and the following year.

Federal Reserve Chairman Jerome Powell said the economy is growing at a robust pace and the labor market is continuing to recover well towards the goal of full employment.

Therefore, and because of the higher inflation rate, a tightening of monetary policy is indicated.

A possible risk to the economic outlook is the further course of the pandemic, "including new variants of the virus," said Powell.

The securities purchases are now to be throttled quickly.

In November, paper to the value of 105 billion US dollars (around 93 billion euros) had been purchased, in December it should be 90 billion dollars and only 60 billion dollars from January.

This could expire the program in March, which is a precondition for possible rate hikes, Powell told journalists.

Up until October, the Fed had bought $ 120 billion worth of paper a month.

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

The key interest rate, which is in the extremely low range of 0.0 to 0.25 percent, will not change for the time being.

The monetary policy decisions had been expected in the financial markets.

Hikes in the key interest rate now seem possible as early as mid-2022.

Higher interest rates would slow down high inflation, but at the same time curb the growth of the world's largest economy.

In a new economic forecast, the Fed has now signaled several interest rate hikes for the coming year.

The key interest rate could rise to 0.9 percent in 2022.

In the previous forecast from September, the Fed was still assuming a level of 0.3 percent.

An interest rate of 1.6 percent is now targeted for 2023.

That would be 0.6 percentage points more than in the last forecast.

The Fed's interest rate forecasts represent the average rate hikes expected by the members of the Central Bank Council.

They are not binding on the central bankers.

You can always adjust monetary policy in view of the development of the economy and the labor market.

The US inflation rate was 6.8 percent in November year-over-year, the highest level in nearly 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 high rate of inflation.

In the meantime, prices are rising in many areas of the economy.

Wages, real estate prices and rents are also rising.

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.

There is a "real risk" that inflation expectations will rise more persistently, Powell added.

In its new forecasts, the Fed revised its inflation expectations upwards again.

For 2022, the central bank is now expecting an inflation rate for consumers of 5.3 percent.

In September it had assumed 4.2 percent.

For 2022, the Fed expects an inflation rate of 2.6 percent, 0.4 percentage points more than in the September forecast.

In the medium term, the central bank is aiming for an average inflation rate of around 2 percent.

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The Fed lowered its forecast for economic growth this year again.

In September the central bank was still assuming an increase of 5.9 percent, now it expects growth of 5.5 percent.

In June, the central bank had expected growth of 7 percent for the world's largest economy.

For 2022, the monetary authorities are now assuming growth of 4 percent.

The Fed continues to assess the situation on the labor market very positively.

The central bank expects an unemployment rate of only 3.5 percent by the end of next year.

That would correspond to the state of full employment and the value before the corona pandemic.

At the height of the Corona crisis, the rate had reached almost 15 percent, now it is 4.2 percent.

Many companies already complain of a shortage of workers.

dpa