Central banks in Europe and the US, faced with the inflation puzzle and the omicron variant

Will the big central banks change course in 2022, following the massive support provided during the pandemic? The US Federal Reserve (Fed) and the European Central Bank (ECB) debate it this week in a context of strong inflation and the spread of the omicron variant of the coronavirus.

The Fed’s monetary policy committee (FOMC) will announce its intentions on Wednesday, before the ECB addresses the issue in its Board of Governors.

The two institutions must calibrate their announcements: yes prematurely adjust interest rates, They could cripple the recovery, while if they wait too long it will be difficult to control inflation, which returned after a decade of controlled prices.

The United States has emerged from the recession but employment has not yet recovered to its pre-pandemic level.

The omicron variant raises concerns of a new worsening of logistics problems, which seemed to have improved in recent weeks, as happened with the progressive decongestion of the port of Los Angeles, California.

But the increase in prices in the United States, at an unprecedented rate in almost 40 years for the month of November (6.8%) could weigh heavily.

Transitory inflation

Markets await the announcement of an acceleration of the reduction of the Fed’s asset purchase program.

In November a change of rhythm had already begun: from 120,000 million dollars per month, purchases must be reduced by 15,000 million per month until they reach zero in mid-June 2022.

"If an argument was needed to convince the US Federal Reserve of the need for a quicker exit from ultra-complacent monetary policy, it was provided by inflation." November, analyzed Elmar Volker, from the LBBW bank.

That acceleration would open the door to one or more interest rate hikes in 2022.

But such hikes "faster than anticipated could constitute a policy error" and slow growth, warned Kathy Bostjancic, chief economist at Oxford Economics.

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If the Fed hints at interest rate hikes by 2022, it will increase the pressure on the ECB. The European body has so far been reluctant to propose a schedule for normalizing its monetary policy.

From an inflation point of view, the two institutions do not follow the same line, and Fed Chairman Jerome Powell recently acknowledged that it is not a transitory difference.

Christine Lagarde, President of the ECB, recently said she was "convinced" that inflationary pressure is temporary and that it will be reduced in 2022, thanks to the expected drop in energy prices.

Prices in the euro area have grown 4.9% in the last year to November, the highest in 30 years.

Omicron on the table

But the omicron variant came to complicate the equation by shaking the next exit from the crisis.

Although the most rigorous of the Board of Governors of the ECB pretend "a somewhat brash exit from complacent monetary policy", the omicron variant could impose "a little humility"predicted Ludovic Subran, Allianz’s chief economist.

Those responsible for the ECB have repeated that the purchases of assets of the emergency program against the pandemic (PEPP) will be stopped as planned from the second quarter of 2022.

Those purchases are currently occurring at a rate of 80 billion euros ($ 96 billion) per month.

But given the doubts raised by the new variant, will it be necessary to compensate for the sharp decline in purchases after the PEPP?

One option would be to extend the previous asset purchase program called APP, of around € 20 billion ($ 24 billion) a month. Such an announcement would only be made at an upcoming meeting in early February, according to observers.

A rate hike in the euro area is "very unlikely" by 2022 so as not to jeopardize the recovery in Europe, Lagarde insisted.

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