Fed Quick Analysis: Higher rates? Hold your horses, Powell could pummel the dollar back down

  • The Federal Reserve has left interest rates unchanged as expected, and the dollar reacted to the dot plot.
  • The economic improvement has pushed several members to bring forward their rate hike expectations to 2023.
  • Fed Chair Powell could dismiss talk of early tapering of bond buys, pushing the dollar down.

The hawks are awakening – that seems to be the message from the Federal Reserve's "dot plot," causing jitters in markets and supporting the dollar. The Fed has released new economic forecasts, and there are now more members foreseeing a rate hike in 2023.

The new dot-plot shows 13 members projecting a rate hike in 2023, and a borrowing cost of 0.625 – two rate hikes in that year. Back in March only seven out of 17 backed a lift-off in 2023. Regarding the outlook for 2022, seven members now back a hike next year against only four last time. 

According to the bank's proposed timeline, the world's most powerful central bank would first taper down and halt its bond-buying scheme before raising rates. The upgrade in projections – also in growth, inflation and employment ones – raises speculation of an early reduction in dollar printing. The Fed currently buys $120 billion worth of debt every month.

However, previous experience tells a different story. Federal Reserve Chair Jerome Powell has the last word in determining the market reaction and he is a dove – rejecting any premature tightening. He will likely dismiss any imminent tapering and reiterate his usual messages – millions of Americans are still out of work and inflation is "transitory."

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The last two Nonfarm Payrolls reports fell short of expectations and showed employment cannot be returned with a switch of a button. Regarding inflation, the jumps in prices of components related to the rapid reopening – air fares, used cars and apparel for example – provide Powell plenty of ammunition to curb hawks' enthusiasm.

A cautious Fed Chair could send the dollar back down. 

Federal Reserve Preview: First up, then down? Playbook for trading the Fed


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