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Fed on the defensive

FILE - This May 4, 2021, file photo shows the Federal Reserve building in Washington. The risks to the U.S. financial system have eased significantly compared to a year earlier, the Federal Reserve said Monday, Nov. 8, 2021Premium
FILE - This May 4, 2021, file photo shows the Federal Reserve building in Washington. The risks to the U.S. financial system have eased significantly compared to a year earlier, the Federal Reserve said Monday, Nov. 8, 2021

New data and fresh risks posed by the Omicron variant of the covid virus, however, may have forced the Fed to reconsider its earlier position. An accelerated drawdown of its ‘quantitative easing’ might be followed by an actual hike of its policy interest rate

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Federal Reserve chair Jerome Powell sent ripples of concern all around on Tuesday by saying that the US central bank’s bond-buying programme that it had decided to taper month after month towards a mid-2022 end could be wound up sooner. Plans to do so, he said, would be taken up at a policy meeting scheduled later this month.

Economic growth in the US has been robust, but the Fed appears to have had a rethink on inflation. ‘Transitory’ was the term Powell used recently to describe rising prices, even as critics warned that it could prove too persistent to merit that label. New data and fresh risks posed by the Omicron variant of the covid virus, however, may have forced the Fed to reconsider its earlier position. An accelerated drawdown of its ‘quantitative easing’ might be followed by an actual hike of its policy interest rate. This could shake up global flows of capital and impact currency and asset markets. Retaining the dollar’s dominance of cross-border transactions has long been an American goal. This involves an assurance that its purchasing power will not be allowed to diminish too fast. The Fed’s fulfilment of this pledge, though, could hurt other economies.

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