Dhe US Federal Reserve initiated the expected turnaround in monetary policy at the last meeting of the year and thus reacted to the persistently high inflation figures. It ends the bond purchase program earlier than previously announced by reducing monthly purchases of government bonds and government-backed mortgage bonds by $ 30 billion to $ 60 billion per month from January onwards.
At the same time, however, it is sticking to its key interest rate range between 0 and 0.25 percent. This is true until maximum employment has been achieved in the American labor market. The official unemployment rate in November was 4.2 percent. The Fed did not specifically specify the labor market indicators for which it considers maximum employment to be achieved. Fed chief Jerome Powell said that analysis would be made dependent on a number of factors, including unemployment rates and employment levels. In his estimation, however, the labor market is improving rapidly. This is expressed in the central bankers’ projections, according to which unemployment will continue to fall and will reach a rate of 3.5 percent by the end of the year. The projections also show that central bankers expect an average of three interest rate hikes in the coming year.
The reason for the earlier end of the bond purchases is the increased inflation. The CPI inflation indicator recently reached its highest value in 39 years at 4.9 percent. The PCE, preferred by central bankers, had climbed to 4.1 percent in October, if the volatile prices for food and energy are factored out. Wholesale prices had also risen sharply recently. The central bankers themselves now expect inflation to climb to 4.4 percent by the end of the year, only to shrink to 2.7 percent in the coming year and to 2.1 percent in 2022, close to the inflation target.
The Fed announced that it would no longer use the attribute “temporarily” to describe inflation. However, she continues to assume that the pressure on prices will ease. “The economic path continues to depend on the path of the virus,” said the Fed announcement. Advances in vaccinations and the resolution of supply bottlenecks would not only boost the economy and increase employment, but also reduce inflation. However, the central bankers have one caveat: The new virus variants could cloud the outlook. The decisions were received positively on the financial markets. The dollar initially rose, but then came under pressure. Commodities such as gold and oil benefited from the weaker dollar and gained.
According to the previous plan, the repayment of the bond purchase program will be further reduced by 30 billion dollars each in February and March, so that it will end in March. However, if inflation shows more persistent than expected, the program could be brought back to zero sooner, Powell made clear. When asked why the Fed is still buying bonds at all, given the historically high inflation, Powell said experience had led the Fed to embark on a systematic, methodical exit path. Without specifically saying it, Powell was alluding to the so-called “Taper Tantrum”, in which his predecessor Ben Bernanke had brought turbulent and emerging markets into a crisis situation by surprisingly announcing a restriction on quantitative easing. The time frame for the duration of the bond purchase program also indirectly determines the interest rate policy. Powell made it clear that interest rate hikes were almost impossible before the bond purchase program expired.
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