Fed anticipates end of asset purchases and foresees three rate hikes in 2022

The US Federal Reserve (Fed) announced on Wednesday that it will end its asset purchase program ahead of schedule, thus opening the door to three increases in its benchmark rate in 2022, with an eye toward fighting inflation.

Inflation in the United States will be above expectations, at 5.3% in 2021 and 2.6% in 2022, the Fed indicated at the end of its last monetary policy meeting of the year.

Thus, to counteract inflation, it will end its asset purchases in March, three months earlier than initially announced, which will then allow it to increase its reference rate. Its directors unanimously agreed that the increases begin in 2022 and that there be up to three increases.

The widespread rise in consumer prices, more persistent than expected, hits American families hard.

“Imbalances between supply and demand related to the pandemic and the reopening of the economy continued to contribute to high levels of inflation.”Said the agency’s monetary committee (FOMC) in a statement after two days of meetings.

President Joe Biden promised to reverse the problem. But their room for maneuver is limited. Rising interest rates, which contain demand by increasing credit costs, is the most traditional tool to ward off inflationary pressures.

Advancement

The Fed will bring forward the end of its asset purchase program by a few months, which began to reduce in November from the US $ 120,000 million a month it introduced in the market, and which will now end in March instead of June 2022.

The institution was shown “willing“To adjust purchases of bonds and securities if justified by changes in”economic prospects”, According to its statement.

The entity, which helped the economy in record time in 2020 in the midst of the pandemic, is now acting to contain inflation, which in November reached a maximum in almost 40 years, standing at 6.8% at 12 months.

The figure far exceeds its target of 2%, considered healthy for the economy.

The Fed also stressed that it will keep its rates low until the job market improves.

At the moment, it projects an unemployment rate of 4.3% this year and 3.5% in 2022, which was the level of February 2020, just before the pandemic broke out.

Rates, inflation and GDP

The rise in reference rates never has an immediate impact on inflation.

“The main reason is that the guideline interest rate is reflected after a certain time in the short and medium-term loan rates.”Explains Gregory Daco, chief economist at Oxford Economics.

The market is wondering to what levels the rates will rise, which are currently between 0 and 0.25%.

On the other hand, according to the new Fed projections, GDP growth in 2021 will reach 5.5% compared to 5.9% in September.

Powell was optimistic Wednesday about economic growth in the United States in 2021.

“Economic activity is on track to expand at a robust pace this year, reflecting progress in vaccination and the reopening of the economy.“, He said at a press conference.

Too much money?

Biden, whose popularity rating is particularly low, is accused by the Republican opposition, and even some Democrats, of fueling inflation by injecting too much liquidity into the economy.

Last March it promulgated an emergency plan of US $ 1.9 billion after 3.6 billion already injected in 2020.

In mid-November, he signed a $ 1.2 trillion infrastructure plan, and he hopes Congress will approve another $ 1.8 trillion social and environmental reform plan.

For Republicans, it is too much. For the government, the fact that the plans span a decade is a counterweight to any effect on prices. The government even called them anti-inflationary.