Tighter monetary policy: US Federal Reserve wants to get out of crisis mode

The Fed wants to get out of its extremely loose monetary policy more quickly and is expected to start raising interest rates in the coming year. That should also play a role in today’s ECB deliberations.

When the US Federal Reserve takes decisions and also publishes its outlook for the coming year, the financial world takes a close look. Fed decisions and forecasts have a signal effect around the globe. The Fed is still leaving the key interest rate unchanged at close to zero – but the US Federal Reserve is significantly reducing its securities purchases to stimulate the economy during the corona crisis.

“We are allowing our security purchases to expire faster,” said Fed Chairman Jerome Powell. “Because with rising inflationary pressure and a rapidly improving labor market, the economy no longer needs this support to an ever-increasing extent.”

Originally, the US Federal Reserve had bought up securities for $ 150 billion every month. These purchases will now be gradually ramped down to zero through March. An initial rate hike can then be expected from April, at the latest by mid-2022.

Three key rate hikes possible in 2022

The majority of the US Federal Reserve members expect at least three key rate hikes of a quarter of a percentage point each in the coming year. According to most analysts, this means that the US key interest rate could be between 0.75 and 1 percent in a year.

US Federal Reserve Chairman Powell is thus finally initiating a change of direction. In November, the inflation rate in the US had risen to 6.8 percent, the highest level in almost 40 years. Consumers are feeling this especially when it comes to food and gasoline prices. And President Joe Biden is feeling it as his popularity ratings continue to plummet.

Omikron danger to development

Federal Reserve Chairman Powell also sees the risk of a wage-price spiral in the future. Wages are currently rising faster than they have been in many years, he emphasizes. Regarding the overall economic situation, Powell said the US economy is growing at a robust pace. At the same time, he warned that the spread of the omicron variant of the coronavirus could endanger the economic recovery.

And Powell sees completely different dangers: “For me, the risk of a successful cyber attack is a threat that we would find very difficult to deal with.” A statement that shows how uncertain all forecasts for overall economic development remain.