The Fed and the European Central Bank face the conundrum of inflation and the Omicron variable

Fed Chairman Jerome Powell recently admitted that it can no longer be called “transitional.” (Photo: Getty Images)

FRANKFURT – Will major central banks change course in 2022 after massive support during the pandemic? The US Federal Reserve and the European Central Bank are discussing it this week on the back of rising inflation and the worrying Omicron variable.

The US Federal Reserve’s Monetary Policy Committee (FOMC) will report on its intentions on Wednesday, before the European Central Bank follows suit on Thursday after the Governing Council.

The two institutes must carefully calibrate their advertising: if they tighten their adaptive policy prematurely, they risk paralyzing the recovery. By waiting so long, they will find it difficult to tame inflation, which is coming back in force after a decade of stagnant prices.

The US has come out of recession, but employment has not yet returned to pre-pandemic levels.

The arrival of the Omicron variant raises fears of worsening logistical problems, which have subsided in recent weeks, such as the gradual easing of congestion at the Port of Los Angeles in California.

But the increase in US consumer prices, at a rate not seen in nearly 40 years for the month of November (6.8%), is likely to have a significant impact.

transient lasts

Markets are relying on news of the acceleration of the Fed’s asset purchase program.

This had already begun, last month, a clear change of pace: from 120 billion US dollars per month, purchases must be reduced by 15 billion each month, until it is brought back to zero in mid-June 2022.

See also  The UK free trade is now subject to more export rules than any country in the world.

“If another argument was needed to convince the US Federal Reserve of the need for a faster exit from ultra-accommodative monetary policy, it was provided by inflation” in November, LBBW’s Elmar Volcker analyzed.

This acceleration would open the door to one or more rate hikes starting in 2022.

But Kathy Bostancik, chief economist at Oxford Economics, warns that raising interest rates “faster than expected could be a policy error” and hurt growth.

If the Fed proposes raising interest rates for 2022, the pressure on the European Central Bank will increase. The guards of the euro have so far been reluctant to discuss a timetable for normalizing their monetary policy.

In terms of inflation analysis, the two institutions are not on the same wave either, Jerome Powell recently realized that they can no longer be considered “temporary”.

It was recently said that Christine Lagarde is “convinced” that the rise in inflation is temporary and that it will fall in 2022, thanks in particular to the expected decline in energy prices.

Eurozone prices rose 4.9% year-on-year in November, their highest level in 30 years, and reluctance to have an increasingly temporary nature grows.

European Central Bank: No reckless exit

But the alternative Omicron comes to play the spoiler and complicate the equation by questioning the picture of an imminent exit from the crisis.

While the toughest, on the ECB’s Governing Council, are tempted by a “rather precipitous exit from accommodative monetary policy”, Omicron risks forcing them to “a little bit of humility”, predicts Ludovic Subran, chief economist at Allianz.

See also  Makram physicist | Journalism

European Central Bank officials have repeatedly said that purchases of Pandemic Emergency Program (“PEPP”) assets will stop as planned from the second quarter of 2022.

These purchases are currently sailing at a rate of about 80 billion euros per month, with a total envelope of 1,850 billion.

Is it necessary, especially in the face of unknown Omicron, to compensate for the sharp decline in purchases after PEPP, and how?

One option is to extend the old asset purchase programme, APP, by inflating its cover, which currently stands at around €20 billion per month. Observers said such an announcement would not come until the next meeting in early February.

Lagarde has insisted on several occasions that a rate hike in the eurozone remains “extremely unlikely” for 2022 so as not to jeopardize the recovery of the old continent.

Leave a Reply

Your email address will not be published. Required fields are marked *