The Federal Reserve provided multiple indicators on Wednesday that its extensive policy of quantitative easing, since the beginning of the Corona pandemic, is approaching, pointing to aggressive monetary policy moves in response to rising inflation.
The US Federal Reserve said it would speed up reducing its monthly bond purchases. Which he will reduce to 60 billion dollars starting in January, a decrease from 120 billion dollars per month before November, in what is a significant acceleration of the program that was launched last month through a gradual reduction of 15 billion dollars, and the reduction doubled to 30 billion dollars in December, then it will double again next January.
The US central bank also expects to start raising interest rates in late winter or early spring, which were held steady at this week’s meeting.
Forecasts released on Wednesday indicate that Federal Reserve officials expect up to 3 interest rate increases to come in 2022, followed by two the following year and two more in 2024, CNBC reported, and Al Arabiya.net saw it. .
For his part, Chairman Jerome Powell said in his press conference after the meeting: “Economic developments and changes in expectations justify this development in monetary policy, which will continue to provide appropriate support to the economy.”
The moves by the Federal Open Market Committee, which were approved unanimously, represent a fundamental adjustment to the policy that was the least flexible in its 108-year history. The post-meeting statement noted the impact of inflation.
Inflation is higher than expected
“The supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to high levels of inflation,” the statement said.
The committee sharply raised its inflation forecast for 2021, to 5.3% from 4.2% for all items and to 4.4% from 3.7% for the rest of the index components, excluding food and energy. For 2022, forecasts are now at 2.6% for core index components and 2.7% for core inflation, both higher than in September.
Meanwhile, the unemployment rate forecast for 2021 fell to 4.3% from 4.8% in September.
“Job gains have been solid in recent months, and the unemployment rate has fallen significantly,” the statement noted.
However, members came out on the hawkish side of the policy moves, leaning strongly towards higher interest rates.
The votes indicated that only 6 of the 18 FOMC members saw an opportunity to raise interest rates by less than three increases next year, while none of the members expected rates to remain at their current levels.
Economic growth forecast
The vote came as the statement reiterated that the Fed’s overnight borrowing rate would remain near zero “until labor market conditions reach levels consistent with the Committee’s assessments of maximum employment.”
The committee lowered its forecast for economic growth this year, as it saw GDP rise 5.5% for 2021, compared to the 5.9% indicated in September. Officials also revised their forecasts the following year, raising growth in 2022 to 4% from 3.8% and cutting 2023 to 2.2% from 2.5%.
The statement indicated once again that developments with the Covid pandemic, especially with the changes, pose risks to the outlook.
Both policy moves came in response to surging inflation, which is running at a 39-year high for consumer prices, with wholesale prices in November jumping 9.6%, the fastest rise ever in a sign that inflation pressures are becoming more entrenched.
