The U.S. Federal Reserve on Wednesday announced a faster tapering of the central bank's asset purchase program while projecting three interest rate hikes next year, as the U.S. inflation surged to the highest level in almost 40 years.
"Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation," the Federal Open Market Committee (FOMC), the Fed's policy-making committee, said in a statement after a two-day policy meeting.
"In light of inflation developments and the further improvement in the labor market," the committee decided to reduce the monthly pace of its net asset purchases by 30 billion U.S. dollars, starting with the mid-January purchase schedule.
"The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook," the statement said.
The central bank began in November to reduce its monthly asset purchase program of 120 billion dollars by 15 billion dollars. The announcement on Wednesday put the central bank on track to end asset purchases by March, three months earlier than initially planned.
"We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support," Fed Chairman Jerome Powell said Wednesday afternoon at a virtual press conference.
"In addition, a quicker conclusion of our asset purchases will better position policy to address the full range of plausible economic outcomes," Powell said.
Over the past several weeks, some Fed officials and economists have urged the central bank to accelerate the pace of tapering to give more leeway to raise rates sooner amid inflation pressures.
The consumer price index (CPI) rose 6.8 percent in November from a year earlier, the fastest annual pace in almost 40 years, according to the U.S. Labor Department.
The Fed has pledged to keep the federal funds rate unchanged at the record-low level of near zero since the start of the pandemic.
Fed officials' median interest rate projections released Wednesday showed that the central bank could raise the benchmark interest rate three times next year, up from just one rate hike projected in September.
"The Fed has made a full pivot from viewing inflation as transitory to more persistent and problematic. The Fed is clearly worried about inflation becoming more entrenched, even as it starts to retreat in 2022," Diane Swonk, chief economist at major accounting firm Grant Thornton, said Wednesday in an analysis.
"This marks the first time that the Fed has openly chased instead of preempted inflation since the 1980s," Swonk said, adding a more persistent inflation could justify even more rate hikes than the Fed has penciled in for the year.
While these measures announced on Wednesday represent a change in Fed policy, it is questionable whether they were sufficient to bring U.S. inflation back toward the Fed's 2 percent inflation target, Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund (IMF), told Xinhua.
"Even after today's measures, U.S. monetary policy will remain excessively loose over the next few months. The Fed will still be buying bonds and interest rates will remain negative in inflation-adjusted terms," Lachman said.
"Accordingly, while I do believe that we will get some reduction in inflation as global supply chains are repaired, I do not believe that inflation will decline in 2022 to the 2.6 percent rate that the Fed is forecasting," he added.
In terms of the impact of the Fed policy on emerging markets, Lachman said that "we are already seeing capital flows to the emerging markets drying up on the expectation of higher U.S. interest rates next year."
"If the Fed is forced to raise interest rates at a faster pace than presently planned, we must expect capital to be repatriated from the emerging markets. This could be problematic for many emerging market economies that have very high debt levels," he warned.
In a blog post published on Wednesday, IMF officials noted that a crucial challenge for policymakers is to "strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation," as global debt rose to a record 226 trillion dollars last year amid the pandemic.
"The risks will be magnified if global interest rates rise faster than expected and growth falters. A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms," they said.
The IMF officials suggested that some countries, especially those with high gross financing needs or exposure to exchange rate volatility, may need to adjust faster to preserve market confidence and prevent more disruptive fiscal distress.
In addition, the pandemic and the global financing divide demand strong, effective international cooperation and support to developing countries, they noted.
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