The Fed’s turning point: aid stops in March, then the rate hike

To curb inflation, Governor Jerome Powell announces the expected acceleration of “tapering”: the program of aid to the economy will be slowed down quickly to end in March, no longer in May. And in 2022, the US central bank expects three increases in interest rates, namely the cost of money

Right on the tail of 2021, the year of the great rebound of the economy after the collapse from Covid, comes the expected turning point of the Federal Reserve: the American central bank announces that the aid plan will be reduced much faster than it was decided just two months ago. Because? What is happening?

The turning point from the labor market

It is that the big sick man – the American economy – is giving clearer and clearer signs of a quick recovery, first of all from the good data on the employment front, so it is possible, indeed we must begin to drastically reduce medicine; also to defuse a disruptive side effect such as inflation, which usually accompanies growth, and this very fast re-growth in particular. And the containment of prices is precisely in the mission of the central bank of Washington.

Hence the decision to reduce the aid program launched in a hurry in the spring of 2020: during the pandemic, the Fed put in 120 billion dollars a month, then dropped to 105 and, from January, it will drop to 90. Di this step, the plan will close in March. Only at that point, Governor Powell clarified, will a new phase open: the increase in the cost of money, for now confirmed – as for many years – between 0 and 0.25%.

Three rate hikes in 2022

The Fed expects three rate hikes in 2022, and as many in 2023. It means accompanying economic growth by trying not to overheat prices: the increase in GDP is estimated at 5.5% this year, with inflation expected to increase further: 5.3% at the end of 2021. This is why the medicine must be removed quickly, says Powell: so in the next year the increase in prices should be under control.