At its January 25-26 meeting, the US central bank confirmed that it would raise interest rates as of its mid-March meeting.
Above all, it indicated that very soon after it would begin to shrink balance sheet. This theme which had cluttered the minutes of the meeting of December 14 and 15, 26 quotations on this theme, has become reality. Its implementation could start as soon as the fed funds rate starts to rise.
The surprise is on this point, much faster than expected even with a careful reading of the minutes.

Such speed of execution should initially push up US long-term interest rates. This will result in a rise in long rates elsewhere in the world.
Global liquidity will shrink after this Fed move weighs on overall economic activity.

The reason for this speed of execution is to prevent the rise in inflation from prolonging and weighing down the US economy over time. Too high an inflation rate without a central bank response could have led to behaviors leading to greater inflation persistence. The Fed did not want to take that risk.

This regime change will weigh on US growth at a time when the White House is in trouble. The government cannot push through its “Build Back Better” plan and its electoral reform has failed. Joe Biden’s decline in popularity weighs on voting intentions. The Democrats are set to lose control of Congress in the midterm elections next November.

The close guard, the Fed, intervenes to rescue the White House in order to limit and then reduce the risk on inflation because households are very sensitive to it. If it works, the Democrats will be in a better political position for its midterm elections.

The scheme is therefore to intervene very quickly to quickly reduce the risk of inflation being too high for too long. The impact on the economy is secondary due to the good performance of the labor market and the collapse of the unemployment rate to 3.9% in December 2021. If inflation is defeated before the summer, the issue of purchasing power, which is always very important during elections, could take a back seat, reducing the political risks for the Democrats.