US Federal Reserve winds back £88bn a month Covid stimulus

The US Federal Reserve last night said it would start scaling back its massive pandemic stimulus package as countries around the world grapple with rising inflation.

America’s central bank plans to start tapering the £88billion a month bond-buying programme it launched last year to inject money into the economy.

The move came as the Bank of England prepared to reveal the outcome of its own knife-edge vote on interest rates in the UK.

The much-anticipated decision by the Monetary Policy Committee (MPC) – one of the hardest to predict in years – will be announced at noon today, with observers split over whether rates will stay at 0.1 per cent or rise to 0.25 per cent. That would be the first hike since 2018 and only the third since 2007.

By contrast, European Central Bank president Christine Lagarde dismissed talk that rates could also rise in the eurozone.

She insisted the outlook for inflation over the medium-term was ‘subdued’ and suggested rates would not rise before 2023.

Like the mighty Fed in the US, the Bank of England appears less sanguine as the nine-member MPC weighs the need to tame rising prices while supporting the economic recovery. 

The Bank slashed rates to a historic low of 0.1 per cent last year to encourage spending during the Covid crash.

But it is under pressure to raise them again amid warnings inflation is heading towards 5 per cent, well above the 2 per cent target.

The Bank held off a rise at its meeting in September, worried that moving too soon could put the brakes on the UK recovery.

Higher interest rates could prompt households and businesses to hold on to their money rather than spend it, as it becomes more expensive to borrow. Mortgage holders would see their repayments climb.

Economists are still divided over whether it is now the right time for the Bank to act, as lacklustre economic growth in recent months has been accompanied by high levels of inflation.

But traders expect a hike in the Bank’s base interest rate to 0.25 per cent today, amid signs that higher inflation might be more persistent than expected.

The Bank’s Governor, Andrew Bailey, has spoken in recent weeks of the need to act to keep a lid on rising prices. 

But other colleagues have voiced concerns that a hike will do little to contain inflation, which is largely caused by supply problems, rather than too much demand.

The Fed’s decision to taper its bond-buying signalled that the world’s largest economy is worrying about rising prices.

Danni Hewson, a financial analyst at AJ Bell, said: ‘While the Fed hasn’t altered interest rates it is going to start tapering bond buying – a tacit admission that inflation, though still expected to be transitory, might well hang around a little longer.’

Inflation has been uncomfortably high in the US, hitting 5.4 per cent in September, much higher than the Fed’s goal of 2 per cent.

Fed chairman Jerome Powell said: ‘As the pandemic subsides, supply-chain bottlenecks will abate and job growth will move back up.

‘And as that happens, inflation will decline from today’s elevated levels. Of course, the timing of that is highly uncertain.’

Already, the Reserve Bank of Australia and the Bank of Canada have acted to tackle rising inflation.