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US Fed to slash stimulus, raise interest rates

December 15, 2021

With inflation up and unemployment down, the US central bank says it will cut bond purchases faster than planned and hinted that it could raise interest rates three times next year.

https://p.dw.com/p/44KuJ
A man with a leafblower walks in front of the US Federal Reserve building Washington, DC., USA
The Fed is in a tough spot — raise interest rates too fast and the economy cools, too slow and inflation heats up Image: Kerem Yucel/AA/picture alliance

The US Federal Reserve, the country's central bank, announced Wednesday that it would be ending coronavirus stimulus measures at a much faster rate than originally anticipated, citing rising inflation and falling unemployment.

Federal Reserve Chairman Jerome Powell had recently signaled that inflation was seen as a "transitory" problem that would subside when supply chain kinks worked themselves out. Wednesday's decision appears to signal a shift in that assessment.

The decision came after two days of meetings in which the Fed decided to drastically reduce the amount of money it spends purchasing government bonds.

Inflation in the US currently stands at 6.9%, its highest rate in nearly four decades. That means that although the job market has shown strong signs of recovery, increased wages (up 4.2% on the year) and savings are being eaten up as prices climb not only for goods such as groceries, fuel and automobiles but also for rent, hotels and dining.

What does the decision mean?

It is expected that monthly purchases will be slashed by $30 billion (€26.6 billion), double the rate outlined by Powell just over a month ago. Stimulus spending is expected to end altogether as early as March.

Although interest rates have remained near zero for the past two years and were scheduled to be raised once next year, the Fed has now signaled that borrowers can expect to see it go up as many as three times in 2022. The interest rate exerts influence over consumer and corporate borrowing, which will become more expensive as a result.

Economists warn that raising interest rates too quickly risks dampening consumer and business spending, thus weakening the overall economy — but not raising rates risks fueling further inflation.

Fed members say they are confident inflation will begin to fall by the third quarter of next year, yet outside economists are not so sure, pointing to increases in wholesale inflation (9.6% on the year — the highest rate in over a decade), the cost of homeownership (currently rising at 5%), and rising restaurant prices (5.8% on the year).

The Fed is currently aiming to keep inflation capped at 2% for fiscal year 2022.

Thousands wait in line at food banks

js/fb (AFP, AP)