Central banks: towards a withdrawal of monetary aid
The major central banks held their monetary policy meetings in December. At the mid-December FOMC meeting, the Fed doubled the pace at which it is reducing its asset purchases and changed its economic projections. The Fed dropped language describing inflation as largely transitory, noting instead that supply and reopening problems "have continued to contribute" to high inflation. The Fed now expects core inflation to be 2.7 percent in 2022, up from a previous projection of 2.3 percent. In addition, the Fed expects this measure of inflation to remain above 2 percent in 2023 and 2024. In addition, the Fed believes the unemployment rate will fall to 3.5 percent by the end of 2022, down from a previous estimate of 3.5 percent by the end of 2023. Reflecting high inflation and faster improvement in labor market conditions, the median rate projection for 2022 has been raised from zero to one rate hike to three rate hikes. The same median projection calls for a policy rate of 2.1 percent in 2024.
The European Central Bank's statement confirms that it will end its net asset purchases under the Pandemic Purchase Program ("PPP") in March 2022. But, as expected, the ECB has committed to simultaneously step-up regular purchases under the Asset Purchase Program ("APP"). This is, however, a significant reduction in monetary support. And the commitment to further reduce the APP to 20 billion euros per month is a bit more aggressive than the markets had anticipated. The most striking change is in the inflation forecast for 2022, which nearly doubled from 1.7 percent in the September forecast to 3.2 percent in December. But the most significant increase is in the inflation forecast at the end of the "projection horizon." It went from 1.5 percent in 2023 in the September forecast to an inflation forecast of 1.8 percent in 2024. Finally, the Central Bank of England and the Norwegian Central Bank raised their policy rates in December in response to rising inflation.