The head of the Federal Reserve, Jerome Powell, has delivered what the markets had generally expected: a key interest rate hike in March can now be booked with confidence, the accelerated exit from the bond purchase program by early March and a strategy for the downsizing of the $9 trillion large Bond portfolios had also been calculated.
The financial markets reacted with swings in both directions.
The turnaround in interest rates, which is now scheduled for March, can be seen as an admission by central bankers that inflation has been much more persistent than the Fed had expected.
At 4.7 percent in November, it was not only significantly higher than the central bank's inflation target of 2 percent, but also much higher than the central bankers' forecasts.
With their forecast of a maximum of 2.5 percent, they found themselves in good company with the International Monetary Fund, the auditors of Congress, highly paid bank economists and the economists of the White House.
That shouldn't be a consolation for Powell, but an occasion for modesty, which he actually emphasized. In fact, he sees the current situation as highly uncertain due to the still ongoing pandemic and geopolitical risks. He therefore made it clear that the central bankers have not made any preliminary decisions for the Fed meetings after the March meeting. In previous cycles, the Fed used to raise interest rates in small increments at each meeting until the threat of inflation seemed to have passed. Powell didn't rule out the possibility, though, and to some extent reinforced it, noting that the economy and jobs have been significantly stronger than in the last tightening cycle of 2016-2019, while inflation is significantly higher.
The big question now is whether it can tighten monetary policy without triggering a recession.
This has not always worked out well in the past.
Another question lurks on the horizon: was the Fed actually well advised to realign its monetary policy when it decided to no longer fight inflation preventively?