More than expected hawkish Fed, BoE the first to hike rates after pandemic and ECB reducing stimulus, were the highlights of the most important events last week
The policy meetings of the three major world central banks in past two days were the top events in the financial world last week.
The final meetings in 2021 brought some surprises from the policymakers, while some decisions were in line with expectations.
The US Federal Reserve was the first in a row, expressing more than expected hawkish stance by speeding up the stimulus reduction and signaling more aggressive approach in 2022, the Bank of England surprised my 0.15% rate hike, being the first to start tightening pandemic-lead ultra-loose monetary policy, while the European Central Bank was the most dovish by reducing the support to the economy, but signaling it will continue to help in 2022.
The decisions leave the world’s two biggest central banks on opposite courses and signal widening divergence between two policies after the Fed accelerated its exit from asset purchases and flagged several rate hikes, while the ECB’s action was milder, raising concerns as similar divergences have led to market turbulence in the past.
The US Federal Reserve
The US Federal Reserve, in its last policy meeting this year, announced it will double the pace at which it is scaling back bond purchases to $30 billion per month, expecting to end the program by March 2022, earlier than initially planned program’s mid-year end.
The central bank also signaled it will raise interest rates three times by 25 basis points in 2022, surprising wide expectations for two hikes next year, after holding borrowing costs near zero since March 2020, when measure was imposed to battle strong impact of coronavirus pandemic.
The decision, which proves to be one of the most hawkish in years, shows that the Fed intensified the battle against the hottest inflation in decades.
Fed chair Jerome Powell was upbeat on economic activity and recovery in labor market, in the press conference after the FOMC announced its decision, saying the economy has been making rapid progress toward maximum employment that fulfills central bank’s major requirements to start tightening the monetary policy.
Powell said that policymakers eventually expect a gradual rate of policy firming, but they don’t anticipate raising rates before ending the taper process, though could hike before reaching full employment.
The central bank shows its readiness to fight rising price pressures, even as the pandemic poses an ongoing challenge to the economic recovery, highlighting concerns over the new Omicron variant which continues to pose risk to the economic outlook.
The new rate projections marks a major shift from the last time forecasts were updated in September, when officials were evenly split on the need for any rate increases at all in 2022.
The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.
Economists see more panic than patience in Fed’s message that the policymakers are serious about controlling inflation and willing to hike rates faster and higher, signaling that the US central bank is chasing inflation for the first time in decades.
Bank of England
The Bank of England raised interest rates by 15 basis points to 0.25% in its last policy meeting this year, being the first of the world’s central banks to increase interest rates after coronavirus pandemic.
The nine-member MPC voted by 8-1 to raise interest rate in December’s policy meeting. (more…)
