US Fed becomes first major central bank to blink as it reins in Covid-19 stimulus

The US Federal Reserve has become the first of the world’s major central banks to blink in the face of soaring inflation.

The Fed today decided to rein in the wave of stimulus it unleashed in response to the Covid-19 crisis and slash the scale of its monthly QE programme by $15bn starting this month.

The US economy has rebounded sharply from the depths of the pandemic, reducing the appropriateness of stimulus measures. 

However, like other rich nations, America has succumbed to severe supply chain breakdowns and entrenched imbalances in global supply and demand, which has ramped up inflation.

“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” Fed Chair Jerome Powell said.

“As a result, overall inflation is running well above our two per cent long run goal.”

“Global supply chains are complex. They will return to normal function, but the timing of that is highly uncertain,” Fed Chair Jerome Powell said.

Powell reiterated that price rises will be temporary.

Under the new plans, the Fed’s bond buying programme will end in June next year. Since the onset of the pandemic, it has been hoovering up $120bn in assets each month.

Powell has stressed the importance of getting the American economy to full employment, a key factor that drove the Federal Open Market Committee to leave rates at between 0 and 0.25 per cent.

The Fed’s decision to act on soaring inflation and robust economic growth comes as the Bank of England is preparing to reveal the outcome of the latest round of talks among its rate setting committee tomorrow.

The outcome of the meeting appears to be on a knife edge, with no clear consensus among the committee over the direction of borrowing costs emerging from their public remarks.

Nonetheless, the Old Lady is expected to hike interest rates 15 basis points and possibly end the final leg of its QE programme.

A combination of stickier than expected inflation and a ramping up in hawkish rhetoric from officials on Threadneedle Street has pushed financial markets into betting on a rate rise, forcing yields on UK government debt over the last month.

Governor Andrew Bailey has underlined the need for the Bank to “act” if medium term inflation expectations run out of control. 

The Old Lady’s new chief economist, and successor to Andy Haldane, Huw Pill recently said the need for ultra loose monetary policy had “diminished” in an interview with the FT.

Pressure has mounted on the Bank to act due to the inflation outlook in the UK worsening. 

The Office for Budget Responsibility expects, in a pessimistic scenario, it to reach as high as eight per cent, prompting the Old Lady to hike rates to 3.5 per cent, a level not seen since before the financial crisis.