Home Consumer debt The Fed is heading for exits despite Omicron. Who will follow?

The Fed is heading for exits despite Omicron. Who will follow?

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December 16 (Reuters) – The U.S. Federal Reserve did not beat around the bush on Wednesday when it signaled soaring inflation was its biggest risk and not the potential economic damage from the fast-spreading Omicron variant.

The Fed has doubled the pace at which it will cut its bond purchases, while new forecasts from policymakers pointed to up to three interest rate hikes next year. President Jerome Powell then spoke enthusiastically about the strength of the US labor market. Read more

“The economy no longer needs increasing amounts of political support,” Powell said at a press conference. “In my opinion, we are making rapid progress towards as many jobs as possible.

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However, if any of the Fed’s peers are prepared to follow their lead, that will become clear within the next 24 hours with a rapid succession of meetings of the Bank of England, the European Central Bank and the Bank of Japan. . Read more

Of the three, however, only the BoE is likely to take more than a small step to reduce the monumental support given to its economy during the pandemic. This could set the stage for a turbulent 2022 with a Fed determined to end its asset purchases as quickly as possible and launch interest rates shortly thereafter, while others will be more hesitant to move forward. steer so decisively in that direction.

The BoE could become the first of the major central banks to raise interest rates at Thursday’s policy meeting, but it is also in the UK that the friction between Omicron and inflation far above l objective manifest themselves most vividly.

Daily coronavirus infections in the UK are now at their highest level since the early days of the pandemic, forcing Prime Minister Boris Johnson this week to join opposition lawmakers in imposing further restrictions.

On the flip side, shocking data released Wednesday showed consumer price inflation at a decade-high rate, and financial market bets on a December rate hike fell by about a third to 60. %. Read more

“There is now a real risk that inflation will take hold – especially given the signs of second round effects in terms of wage increases, supported by a strong labor market – but this is offset by the threat to the economic recovery of the new Omicron variant, “said Ellie Henderson, economist at Investec bank.

Investors and economists are not expecting anything so daring this week from the ECB or the BOJ.

The ECB is expected to be among the last to tighten its policy, and the current, unusually dynamic debate centers on whether to downgrade an unusually generous stimulus package. The caveat is easy to understand. The bank has exceeded its inflation target for most of the past decade, so it prefers to act too late rather than too soon, fearing that an ill-advised policy adjustment could destroy years of work.

The euro zone’s recovery is also lagging behind. The bloc is just returning to its pre-pandemic size and the labor market could take another two years to recover. Debt levels are also at record highs, especially in the south of the bloc, so any significant pullback could widen the gap between German and Italian debt, raising questions about the sustainability of these debt levels. .

Since the risk of going too fast seems to far outweigh the risk of going too slow, the ECB is likely to take only the smallest step towards removing extraordinary stimulus this week and signaling strong support , including record low rates, at least until next year.

In Japan, consumer inflation that is rampant in other parts of the world remains largely absent. As such, only a marginal reduction in corporate asset purchases is under discussion at Friday’s BOJ meeting.

While the others are not hard on the heels of the Fed, Powell and the Fed appear to have set an agenda for a tumultuous 2022 as central bankers chart their way out, albeit at dramatically different paces.

“You saw it in his remarks to Congress which were aimed more at tightening earlier than worrying about the health of the global economy,” said Vincent Reinhart, chief economist at Dreyfuss & Mellon. The Fed and other central banks “give the impression that they are heading for the exit. Modern central banking is all about managing expectations and they don’t want to be seen as behind the curve.”

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Additional reporting by Leika Kihara in Tokyo and Balazs Koranyi in Frankfurt; Writing by Dan Burns; Editing by Edwina Gibbs

Our standards: Thomson Reuters Trust Principles.


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