Federal Reserve urged to curb inflation by speeding up pace of tapering

Controlling inflation has become a major challenge in the United States. The Federal Reserve Board, which is responsible for stabilizing prices, should strive to take prompt action.

The Fed has decided to quicken the pace of scaling back its quantitative easing policy, in which it injects funds into the market by buying government bonds and other assets, and to end the purchasing ahead of schedule.

The Fed initially planned to reduce the amount of purchases by $15 billion, or about ¥1.7 trillion, a month to reach zero around June next year, but it has now said that it will increase the reduction amount to $30 billion a month and finish the purchases in March.

The Fed plans to advance the lifting of its virtually zero interest policy and expects to raise interest rates three times next year.

The U.S. economy, which had been depressed by the novel coronavirus pandemic, recovered thanks to the Fed’s monetary easing and the government’s fiscal stimulus. However, discontent among the public has been mounting as price hikes have been accelerating since this spring. It is reasonable to speed up tapering to deter inflation.

The Fed only announced its plan to scale back its quantitative easing policy in early November, so this is a change of course in about a month.

Fed Chairman Jerome Powell has repeatedly said inflation is transitory. However, the U.S. consumer price index rose 6.8% in November from a year earlier, the largest increase in about 39 years. The Fed removed “transitory” from its latest statement, a word it had used before.

Price hikes in the United States are primarily due to supply constraints, in which the supply of goods cannot keep up with growth in demand because of sluggish logistics, labor shortages and other reasons. It is difficult to predict price trends, but even so the Fed cannot escape the suggestion that it misread them.

However, raising interest rates too quickly will chill the economy. The steering of U.S. monetary policy has a great impact on the world. It is hoped that flexible and appropriate decisions will continue to be made.

The Fed is not alone in being urged to deal with inflation.

The Bank of England has decided to raise interest rates, becoming the first major central bank to do so among those in Japan, the United States and Europe since the pandemic began. The European Central Bank, for its part, has decided to end the asset purchases it began as a crisis response measure at the end of March next year.

Meanwhile, the Bank of Japan has decided to maintain its monetary easing policy, including a negative interest rate policy. The BOJ said this is because consumer price readings have remained low in Japan.

If ultralow interest rates are kept intact in Japan amid U.S. rate hikes, the yield on yen-denominated investments will be at a disadvantage, making it likely the yen will weaken against the dollar. A weak yen is advantageous for exports, but it also brings about an increase in costs borne by companies due to a rise in the prices of imports.

The BOJ needs to scrutinize the potential impact on the Japanese economy wielded by changes in the policies of central banks overseas.

— The original Japanese article appeared in The Yomiuri Shimbun on Dec. 18, 2021.