Fed must proceed carefully while monitoring price trends

Editorial

November 6, 2021

The U.S. Federal Reserve Board has decided to normalize its monetary policy, reversing the unprecedented easing that was implemented to deal with the novel coronavirus pandemic. The U.S. central bank must proceed with caution, keeping an eye on economic developments.

The Fed has said it would later this month begin scaling down its quantitative easing program, which has been pumping large amounts of money into the market to stimulate the economy.

Currently, the Fed injects money into the market by purchasing $120 billion (about ¥14 trillion) of U.S. Treasury bonds and mortgage-backed securities every month. And it plans to reduce this by $15 billion per month. If all goes well, the program is expected to end around June 2022.

In March 2020, the Fed began a monetary policy of lowering interest rates to virtually zero and quantitative easing as a response to the COVID-19 pandemic.

Those measures pushed up stock prices and helped companies raise funds, restoring the gross domestic product to pre-pandemic levels in the 2021 April-June quarter. It can be said the measures have helped boost the economy.

On the other hand, prices in the United States have been rising sharply since this spring. The main reason for the price increases is supply constraints caused by such factors as disruptions in the logistic field, shortages of semiconductors and people avoiding work for fear of infection. Year-on-year increases in the consumer price index stood at the 5% range for the five consecutive months through September.

If monetary easing is continued, it will pose a risk of further inflation. The reduction of quantitative easing is appropriate.

The focus from now on will be the timing of raising interest rates. Some market players predict that the Fed will raise interest rates twice or so in 2022 to contain inflation.

However, U.S. growth slowed in the July-September quarter due to supply constraints. The rate hike is designed to keep the economy from overheating, and if the timing of the hike is wrong, the economy could stall.

The U.S. stock market indexes have been at all-time high levels following the easing measures, and any policy change that goes against market expectations could cause turmoil in the financial market.

Fed Chairman Jerome Powell sees the rise in prices as temporary and he intends not to rush into raising interest rates. It is essential that the Fed implement policies with an eye on economic development and release information carefully.

While interest rates are expected to rise in the United States, possibly leading to a stronger dollar, consumer prices in Japan are not rising and monetary easing is expected to continue. As a result, the yen has continued to depreciate against the dollar.

While the yen’s depreciation improves the business performance of exporters, it also raises import prices, including those for crude oil, and leads to higher costs for companies that rely on domestic demand such as transportation companies. Amid the sluggish economy, it is difficult to convert the increased cost into consumer prices, and there are concerns about the impact on subcontractors.

The excessive depreciation of the yen has its downsides. The government and the Bank of Japan should closely watch the impact of the Fed’s policy shift.

— The original Japanese article appeared in The Yomiuri Shimbun on Nov. 6, 2021.