- The Federal Reserve has raised rates for the first time since 2018, as expected.
- Projections for future hikes have met market expectations, weighing on the dollar.
- Chair Powell may open the door to 50 bps hikes, later on, boosting the greenback.
Hawkish now, more hawkish later? The Federal Reserve's dot-plot has shown only a total of seven rate hikes in 2022, just as bond markets see – a 25 bps move in every single meeting this year. One down, six more to go. That is moderately bullish for the dollar, and the limited reaction makes sense.
However, the Fed has had to upgrade both its inflation and interest rate forecasts in the past year, ditching the transitory term and finding itself behind the curve. The war only adds to inflationary pressure in the US – even if it causes demand destruction in Europe, on whose soil the war is raging.
Fed Chair Jerome Powell may want to leave his options open, including for a fast pace of rate hikes later down the line. While the man at the top is a known dove, he is representing the wider committee – and is also under pressure to depress inflation, the No. 1 topic for Americans. That implies a tough approach.
In recent testimony before Congress, Powell was asked if he would follow Paul Volcker, one of his admired predecessors, who pushed the US into recession to kill rising prices. His answer was positive. The question not only represents political pressure but also showed Powell's potential comments.
With Core CPI at 6.4% – more than triple the Fed's target – there is no reason to deny the chance of seven or even ten hikes. It is always helpful flashing a big bazooka, potentially in order to refrain from using it.
For the dollar, the mere existence of such a bazooka could catapult the currency higher.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.