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15 Dec 2021

Econ Digest

The Fed is expected to signal faster monetary policy tightening at the FOMC meeting on December 14-15, 2021


        Amid rising inflationary pressures, the Federal Reserve (Fed) will accelerate the pace of its QE tapering and may signal an earlier policy hike than before. Inflation in the U.S. continues to surge, with the headline inflation rate, as gauged by the consumer price index, soaring to a nearly 40-year high at 6.8%YoY in November 2021. With supply chain bottlenecks and labor shortages in the U.S. unlikely to be resolved in the near future, the U.S. inflation rate will remain high for the foreseeable future while the U.S. labor market will continue to recover strongly. Based on these factors, the Fed has been under pressure to withdraw its accommodative monetary policy and accelerate the implementation of tightening monetary policy. The Fed may consider adjusting its plan to accelerate QE cuts so that it will end all QE by June 2022, as originally planned. The Fed may also hike the policy rate sooner than previously signaled.

        However, the Fed may have to weigh inflationary risk against additional economic risk that could stem from the spread of the Omicron variant of COVID-19 and a deceleration in domestic demand, coupled with geopolitical risks between China and the U.S. over the issue of Taiwan that have intensified again. Hence, the Fed has to assess multiple risks when determining the appropriate time of future policy rate hikes. Should the Fed increase its policy rate quicker than expected, it would not only create volatility in the financial and capital markets, but could also further impede the U.S. economic recovery amid the uncertainty brought on by the prolonged COVID-19 pandemic. Moreover, this does not address supply-side constraints such as labor shortages and congestion at U.S. ports, which could drive up the inflation rate.

        To this end, economic projections and the inflation should be monitored. Close attention should also be paid to the Fed’s new ‘Dot Plot’ that will be released at the FOMC meeting on December 14-15, 2021, which will serve as an indicator of the future direction of monetary policy. KResearch expects the Fed to raise its inflation projections based on what happens then. The Fed ‘Dot Plot’ may also indicate an earlier policy rate hike than it previously estimated in September 2021, and there may be at least two policy rate hikes in 2022. Nevertheless, the Fed may remain cautious and will not ratchet up its inflation projections to avoid signaling a tightened monetary policy sooner than the market now anticipates, which would generate volatility in the financial market.

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Econ Digest