Wednesday, December 15, 2021
Update
Three key rate hikes in 2022
Fed accelerates move away from loose monetary policy
No surprise in Washington: Given the high inflation, the Fed is accelerating its bond purchases. Experts expected that. What is new is that the US Federal Reserve is expecting up to three increases in key interest rates in the coming year.
In view of high inflation and solid economic growth, the US Federal Reserve is accelerating the exit from its enormous aid programs to deal with the Corona crisis. The Federal Reserve (Fed) announced a further reduction in its asset purchases to support the economy. In November, paper to the value of 105 billion US dollars (around 93 billion euros) had been purchased.
In December the level is slated to be reduced by $ 30 billion. In January it should be only 60 billion dollars. This means that the program could expire in spring. With the security purchases, the Fed is pumping additional money into the financial markets to keep lending rates low and stimulate the economy. From the beginning of the Corona crisis until October, the Fed had bought paper worth $ 120 billion a month. The monetary policy decisions that have now been announced were largely expected in the financial markets.
As the outlook of the monetary watchdog around Fed chair Jerome Powell shows, they consider three rate hikes upwards in the coming year to be appropriate. They are thus signaling a stronger tightening of the loose monetary policy than recently expected. At the end of 2022, the interest rate would then be 0.9 percent. The key interest rate could then rise to 1.6 percent in 2023 and to 2.1 percent in 2024. The central bank is thus signaling a stronger tightening of monetary policy than recently expected. For the time being, the monetary authorities left the key interest rate in the range of zero to 0.25 percent.
Inflation rate will remain high in 2022
The Fed is facing the strongest inflationary pressures since the early 1980s. Consumer prices rose 6.8 percent in November. The rate of price increases has thus far exceeded the central bank’s target of 2.0 percent. In its now updated inflation forecast, the Fed assumes that the inflation rate will remain high at 2.6 percent in 2022.
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. Higher interest rates would slow down the recently very high rate of inflation, but at the same time curb the growth of the world’s largest economy.