The US Federal Reserve concluded its first monetary policy meeting for the year on Wednesday, January 22^nd, with the Board of Governors of the Federal Reserve voting unanimously to maintain the target range for the federal funds rate at 0.00% to 0.25%. 

For most of its post-pandemic response, the US Fed stressed that inflationary pressures were temporary and transitory. However, in Q4-2021, the Fed began to pivot from this transitory signalling, as the inflation rate hit levels last seen in 1982.  The Consumer Price Index (CPI) rose by 7.0% y/y in December, whilst Core Personal Consumption Expenditures (PCE), which excludes food and energy prices, was up 4.7% y/y in November. Given this, the US Fed has also confirmed to markets that it could begin to hike interest rates as soon as March, signifying a return of the conventional monetary policy. As in the minutes of the last meeting of the year 2021, the Fed highlighted the key to its decision to hike rates in 2022 would be the rebound in the labour markets, following pandemic led supply chain disruption, which has continued to cause disequilibrium in the US markets.

Going forward, the US economy is likely to accelerate further in 2022 as wages and household incomes improve and spur consumption, supported by continued vaccinations and a phase-out of the effects of the omicron variant. All of which will further strengthen the Feds bullish policy stance. However, in 2022, our concern with the expected hawkish policy sits with lower-income countries with limited space for fiscal support due to ailing government revenues and expected increases in borrowing rates. Monetary policy normalisation could lead to narrowing spreads in interest rates, forcing EMs to respond and defend fund flows in 2022. This could be problematic for some EMs experiencing higher fiscal imbalances on the back of fragile recovery.