Scope for Fed funds rate expectations to adjust higher in favour of USD – BBH

The US Dollar (USD) is a little firmer and 10-year Treasury yields are up near a one-week high around 4.15%. Economists at BBH analyze Greenback’s outlook.

US inflation dragon not yet pinned down

The US February CPI print suggests the Fed can be patient before loosening policy. Annual core CPI inflation slowed less than expected (actual: 3.8%, consensus: 3.7%) and super core CPI (core services less housing, a key measure of underlying inflation) remained high at 4.3% for a second consecutive month in February. Granted, inflation momentum is slowing as the monthly increase in the super core CPI edged down to 0.5% in February after rising by 0.9% in January. Regardless, this is still too high relative to a historical average monthly increase of roughly 0.2%.

We see scope for Fed funds rate expectations to adjust higher in favour of USD because US core price inflation remains sticky, and the economic growth outlook is encouraging.