US Federal Reserve says goodbye to relaxed monetary policy – economy

Exploding prices, rising wages, falling unemployment: Wednesday the US Federal Reserve drew conclusions from the latest economic data and initiated a fundamental reversal of monetary policy. Monetary authorities have announced in Washington that they will begin phasing out massive purchases of US government bonds and mortgage-backed securities in November. With the program, the Fed has injected $ 120 billion into the economy month after month since the outbreak of the Corona crisis in order to keep long-term lending rates low and stabilize the economy. In the future, the sum is expected to decrease by $ 15 billion per month.

For US citizens, the exit decision is likely to have no consequences so far, although borrowing costs for car buyers or manufacturers could increase in the medium term. Nonetheless, the scope of the decision can hardly be overstated, as behind it is nothing less than an attempt to contain inflation, put the end of the zero interest rate policy into perspective and return to principles. more normal directors. Whether this succeeds is completely open.

At the onset of the corona pandemic, the Fed made a significant contribution to preventing an even more dramatic crash in the US economy with its resolute interest rate cut measures. In the meantime, however, the downsides of ultra-accommodative monetary policy are also becoming apparent: this is not the cause of the recent price hikes for gasoline, gas and many staples, which recently pushed the rate up. US inflation rate at 5.4%. But it promotes development.

The signal the Fed is sending with its decision is all the more clear. This does not only mean that she is now very concerned about the development of inflation. On the contrary, there is also growing pressure on the other major central banks of the world to take a more critical look at price increases. The European Central Bank, for example, has so far been reluctant to make a decision because inflation rates in the 19 eurozone countries are very different – from 0.7% in Malta to 6.8% in Poland. . But it is also a fact that the average has doubled to reach 4.1% in a few months. At 4.5%, Germany is even higher.

The Fed has long tried to keep long-term lending rates low

With the start of the exit from its ultra-accommodative monetary policy, the Fed is opening up the possibility of targeting long-term and short-term lending rates again. Many experts are already expecting that after the alleged end of the securities buying program in the spring or summer of next year, the US monetary authorities will start gradually raising their most important policy rate, the day-to-day target range, compared to what was last de facto zero percent. This would be the first rate hike since March 2020 and the first hike since December 2018. On Wednesday, the central bank’s monetary policy committee refrained from taking such a step. He was standing behind Fed Chairman Jerome Powell, who recently said that a key rate hike at this point would be “premature”.

Powell – and with him the majority of the 18-member committee – had long hoped that the price pressure would soon go away on its own, as it was mainly due to temporary production and delivery bottlenecks as a result. of the pandemic. More recently, however, the central bank chief has had to admit that the inflation trend is more persistent and broader than initially assumed. If this development continues, Powell said a few days ago, there is a risk that “in the minds of those who determine prices and wages, excessively high inflation expectations for the future will set.” . If that were to happen, this dangerous spiral of ever-rising prices and wages could indeed set in, turning a small wave of inflation into a tangible inflation problem. Powell stressed that the central bank was determined to “use our instruments in an emergency to continue to guarantee price stability”.

The move could also trigger high inflation

The situation for the Fed is still extremely difficult, because the pandemic is not yet over, and the economic situation remains fragile. The number of employees in the United States is still several million below the starting value of February 2020, although in view of the record number of vacancies, it is not entirely clear whether the citizens concerned cannot not find work or not looking for it at all.

Either way, a premature tightening of monetary policy could dampen the economic recovery in the United States and wipe out any reconstruction successes of recent months. It would not only be a disaster for many workers who have lost their jobs again, but also for the government of President Joe Biden, which after several billion dollars to deal with the pandemic has little financial room for maneuver. Conversely, if the central bank hesitated too long, the consequences could be even more serious: if the monetary authorities allowed inflation expectations to solidify and lead to a wage-price spiral, they would only have to raise the key rates all the more strongly thereafter. The possible consequences would be a deep recession and a stock market crash.

In recent weeks, it has already been possible to observe where the international trend is heading: the Bank of Canada ended its securities buying program relatively unexpectedly, while, to the surprise of many experts , the Australian central bank did nothing when bond yields exceeded the previously tolerated level. The Bank of England may even be planning the first real rate hike: Federal Reserve Chairman Andrew Bailey recently repeatedly warned that “we will be forced to act” if managers and UK consumers are worried about a permanent rise in prices. The decision is expected to be made this Thursday.

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