Washington, 15 Dec (Xinhua) -- The "loosening of the throttle" of US monetary policy is difficult to dispel inflationary pressures
Xinhua News Agency reporter Gao Pan Xu Yuan Xiong Maoling
The US Federal Reserve board announced on the 15th that it will accelerate the reduction of the scale of asset purchases, while most Fed officials expect that the Fed may raise interest rates 3 times next year. Analysts believe that the Fed's monetary policy focus has shifted from promoting employment and economic growth to controlling inflation, but due to strong demand and persistent supply chain bottlenecks, US inflationary pressures are unlikely to ease soon.
Speed up the "scale down" progress
The Fed issued a statement after the end of the monetary policy meeting on the same day, saying that thanks to the progress of the new crown vaccination and strong policy support, the US economic activity and employment indicators continued to strengthen, and the unemployment rate fell sharply. At the same time, supply-demand imbalances continue to drive up inflation.
The Fed decided to double the monthly asset purchases from $15 billion to $30 billion starting in January. At that rate, the Fed expects to end its asset purchases in mid-March.
This is the Federal Reserve Board building photographed in Washington, U.S.A., on Dec. 15. (Xinhua News Agency, photo by Shen Ting)
Fed Chairman Powell said on the same day that the current inflation pressure is high, the job market is strong, the US economy no longer needs to increase the support of loose monetary policy, and a faster end to the asset purchase program will help the Fed better respond to various possible economic changes.
Over the past few weeks, many Fed officials and economists have called for accelerated debt-buying cuts in preparation for the early start of interest rate hikes. Data released by the U.S. Department of Labor on the 10th showed that the U.S. consumer price index rose 6.8% year-on-year in November, the largest year-on-year increase in nearly 40 years.
In its policy statement on the same day, the Fed deleted the previous statement about the "temporary" nature of inflation. Diana Swank, chief economist at Grant Thornton, argues that the shift in the perception of inflation from "temporary" to "more persistent and problematic" suggests that the Fed is concerned that inflation has become more stubborn and wants to moderately adjust monetary policy to contain it while avoiding hurting the economic recovery.
Rising prices have sparked public discontent, coupled with the approaching midterm elections in Congress next year, putting the Biden administration under greater pressure to curb inflation, and to some extent, it has also pushed the Fed to accelerate its "balance sheet reduction". U.S. President Joe Biden announced his nomination for re-election as Fed chairman in November, saying the Fed was playing a key role in addressing the global pandemic in the face of supply chain bottlenecks and rising prices.
Inflationary pressures are hard to dissipate
Desmond Rahman, an economist at the American Enterprise Institute, questioned whether the Fed's latest move would bring U.S. inflation down to its 2 percent target. Rahman told Xinhua that even after announcing the acceleration of debt purchases, the Fed's monetary policy will remain accommodative in the coming months, and the inflation-adjusted real interest rate level in the United States will remain negative.
On November 26, a customer made a purchase at a one-dollar discount grocery store in New York, USA. (Photo by Xinhua news agency reporter Wang Ying)
Rahman pointed out that the rise in inflation in the United States is driven by a series of factors, including loose fiscal and monetary policies, severe supply chain bottlenecks and logistics problems, as well as rising international oil and food prices. He believes that inflationary pressures are unlikely to ease anytime soon.
The Fed's quarterly economic forecasts released on the same day showed that the US core inflation rate will still reach 2.7% by the end of next year, higher than the Fed's 2% target. According to a survey released by the National Business Economics Association, most economists believe that high inflation in the United States will continue until at least 2023.
Worryingly, the longer the price increase lasts, the more likely it is that inflation expectations will change, which in turn will accelerate price increases.
Swank believes that the Fed's decision to "shrink the balance sheet" faster is equivalent to "loosening the throttle" for the US economy, while preparing for the next step of "stepping on the brakes", that is, raising interest rates. The Fed's interest rate forecasts released on the same day showed that Fed officials expect at least one rate hike next year, and most people prefer to raise rates three times next year.
Rahman noted that Powell has made it clear that the Fed will consider raising interest rates only after the end of its bond-buying program, meaning that the decision to raise interest rates will be made as early as Next April. Goldman Sachs economists predict that the Fed will raise interest rates starting in June and then continuing to raise rates in September and December.
It is worth vigilance that the Fed's interest rate hike will push the dollar stronger and the cost of global financing to rise, putting pressure on emerging markets. Rahman pointed out that the expectation of rising US interest rates next year has led to a gradual reduction in international capital inflows into emerging markets, and if the Fed raises interest rates faster than market expectations, international capital will accelerate the return to the United States from emerging markets, and emerging economies with higher debt levels will face serious challenges.
According to the latest figures from the International Finance Association, some emerging economies, such as Argentina, Brazil and Turkey, have been adversely affected by capital outflows.