DIn view of high inflation and solid economic growth, the US Federal Reserve is initiating the exit from its enormous aid programs to cope with the Corona crisis. The Federal Reserve (Fed) announced on Wednesday that it would reduce its economic asset purchases by $ 15 billion to the current volume of $ 120 billion per month for November. With the program, 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, the Fed had already prepared investors accordingly. The tapering of bond purchases is likely to continue gradually in the coming months in the same order of magnitude, so that the program would expire in June 2022. However, the monetary authorities reserve the right to adjust the pace if necessary depending on economic developments.
The key interest rates are likely to stay at the zero line for a little longer. “We do not believe that it is time to raise interest rates,” said Fed Chairman Jerome Powell after the monetary policy decisions at a press conference. Despite a much better situation on the labor market, there is still room for improvement. The first interest rate hike is expected on the stock exchange in mid-2022 – after the end of the bond purchase program. This would make the Fed faster than the European Central Bank (ECB), whose president Christine Lagarde once again dampened speculation on interest rate hikes on Wednesday.
Powell’s statements were well received in the financial markets. The US stock exchanges continued their record hunt with the prospect of a continued supply of cheap money from the central bank for the time being. Powell admitted that the increased inflation in no way corresponded to the Fed’s definition of price stability, but emphasized – as the Council of Central Bankers had earlier in its statement – that behind the increased inflation in the US are primarily temporary factors. He also reiterated that the USA had not yet achieved the goal of full employment despite progress.
The Fed reacted to the corona crisis with an extreme easing of its monetary policy. But meanwhile the central bank is under pressure to shift down a gear. The US inflation rate rose to 5.4 percent in September and thus reached – as in June and July – the highest level since 2008. Inflation is thus well above the Fed’s target of two percent. In view of high energy prices and persistent supply problems in world trade, it is becoming increasingly clear that increased inflation is not – as the Fed initially assumed – a relatively quickly passing phenomenon.
Meanwhile, the US economy has largely recovered from the crisis. In the summer months, growth lost significant momentum due to supply bottlenecks in the industry and the increasing number of corona cases. But the situation no longer seems critical. For example, job creation in the private sector accelerated unexpectedly in October, according to data from the labor market service provider ADP. The US government’s broader labor market report is eagerly awaited on Friday. In September the US unemployment rate fell to 4.8 percent. Before the pandemic, however, it was only 3.5 percent.
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