On 15 December, the Federal Open Market Committee (FOMC) ended a two-day interest-rate meeting and announced that it would accelerate the pace of reducing bond purchases. It is expected to raise interest rates three times each in 2022 and 2023, pushing long-term interest rates to 0.9% in 2022 and 2.5% in 2023 to cool the "high inflation" issue. Although it has been expected by the market that the Fed will accelerate its tapering and loosening, the news that the Fed will raise interest rates three times in 2022 has exceeded market expectations, raising concerns that the Fed's policy tightening pace is too fast. The consequences of this is that there will be more unpredictable policy risks for the global economy and capital markets next year. Therefore, researchers at ANBOUND believe that although the Fed has accelerated the pace of policy tightening, the real rest of whether the Fed can effectively respond to inflation and manage changes in the economic situation has just begun.

During the said meeting, the Fed officially changed its view of inflation trends and no longer described inflation as a "transitory" issue. Fed Chair Jerome Powell frankly stated that inflation is becoming more stubborn, which is a real risk. Supply chain bottlenecks and capacity constraints are more lasting than expected. So far, wage growth has not been the main cause of increased inflation. In addition, the Fed has changed its expectations for economic growth and inflation. It expects that the core PCE inflation rate in 2021 will be 4.4%, up 0.7 percentage points from September, and the core PCE inflation rate in 2022 and 2023 will be 2.7% and 2.3%, respectively, up 0.4 and 0.1 percentage points from June. The Fed revised down the median GDP growth rate in 2021 by 0.4% percentage points to 5.5%, the growth rate in 2022 was 3.8%, up 0.2 percentage points from September, and the growth rate in 2023 was revised down by 0.3 percentage points to 2.2%, and the long-term growth rate was 1.8%, unchanged. This means that the previous expectations for economic growth this year were high and inflation expectations were low.

Powell said that high inflation in the United States has forced the Fed to accelerate tapering and double the speed of reversing its quantitative easing (QE) to bond purchases by USD 30 billion a month. At the same time, he also remarked that the recent increase in the COVID-19 cases and the rapid spread of the Omicron variant pose risks to the U.S economy. It also hinted that the "ultra-loose policy" since the outbreak of the pandemic is coming to an end, and will instead adopt active policy measures to deal with rising inflation. These changes mean that the market and the Fed have concluded their differences on the purported "transitory" nature of the inflation.

The Fed, which was "left behind" by the market, had to change its own judgment of the economic situation and keep up with the market in a more aggressive way. Regarding this significant change, some market institutions commented that "the Fed should have done this a long time ago". The long-term consequences of this kind of monetary policy that is "restrained by the market" actually have a great negative impact on the independence of the Fed and the credibility of its grasp and judgment of the economic situation. Of course, since the Trump Era, many have criticized the Fed for being all too accommodating to the U.S government's economic policies. This year, its insistence on the "transitory inflation" has also shown that the Fed accommodated with Biden administration's intention to restore the economy. Losing its independence, the Fed is also being questioned by the market and this may bring more questions and challenges to its future policies.

Of course, the current controversy about whether inflation in the United States is "transitory" has little significance for the future. Since Powell stated in early December that he had dropped the "transitory" tag, the key issue that is worth paying attention to is the issue of interest rate increases. It is worth noting that the Fed has shown a strong desire to raise interest rates, all on the grounds that it aims to achieve the broad goal of "raising rates". This time, the meeting move one step further. This shows that raising interest rates is what it really meant. However, the sharp turn to speed up tapering and raise interest rates three times shows that the Powell's move may become too aggressive and unwarranted. On the other hand, Bank of America's survey shows that more and more financial institutions are worried that Fed's more aggressive approach to dealing with the policy risks posed by inflation will instead constitute new uncertainty.

As a result, researchers at ANBOUND believe that the test for the Fed really began when it decided to shift monetary policy to raising interest rates. The current policy basis for accelerated tightening is persistently high inflation and rapid economic growth, and the Fed's upward revision of economic growth for next year shows its optimism for economic recovery. Considering the possibility of the spread of the Omicron variant, and if the COVID-19 pandemic persists, or if U.S economic growth slows and causes inflation levels to fall back, the Fed will face the dilemma of whether policy needs to be adjusted again. If inflation continues to rise high in the face of an economic slowdown, the U.S will face the stagflation situation expected by some market institutions. This will put greater pressure on its policy. Continuing to raise interest rates and tighten policies will be detrimental to economic growth, while relaxing the pace means that inflation will lose control, leading to disastrous consequences. With inflation allowed to rise this year, policy adjustment faces a more urgent window period. In fact, the disruption of the global supply chain and the impact of energy issues under the development of carbon reduction are difficult to solve within the short term. With the two policy objectives of employment and inflation separated, the Fed's policy choices will be more difficult.

After the Fed meeting, it seems that the consequences of the policy change have been fully digested in terms of the changes in the U.S capital markets. However, once the interest rates increase, the situation will be completely different, whether the U.S economy can withstand the pressure of interest rate changes under higher leverage remains unknown. In addition, in terms of whether the capital market can fully anticipate policy changes and avoid the occurrence of "tapering panic", the situation is not exactly optimistic. For now, capital markets may be a bit overconfident as the U.S stock market continues to rise. Back in 2018 when Powell first took office as Fed chairman, there were four consecutive interest rate increases at that time, and the U.S stock market and the global market were close to collapse, making it the worst year since 2008. Many have criticized Powell for causing the problem of raising rates too quickly at the time, making capital markets not fully prepared for it. If the situation in 2018 repeats itself, it is even more worrying whether the Fed, also under the leadership of Powell, can manage the changes in the situation and cope with the pressure of the capital market.

Final analysis conclusion:

The Fed's new policy changes have accelerated the pace of tapering and loosening, as well as interest rate hikes. This could possibly affect inflationary issues, and pose consequences beyond expectations for the U.S economy and capital markets. The Fed, which is already lagging behind, will face an even tougher test of whether it can keep up with the changing economic situation and the pace of the market.