US dollar stabilizes in Europe as Fed eyes ‘moderately restrictive’ rates

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“The sentence we removed said that we believe proper monetary policy alone can effectively drive the outcome of 2% inflation with a strong labor market and much of it really isn’t due monetary policy,” Fed Chairman Jerome Powell said.

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Dollar exchange rates pared overnight losses in Europe on Thursday after Chairman Jerome Powell said there was broad support for the Federal Reserve (Fed) to raise its interest rate to a low “moderately restrictive” over the coming months in remarks that validated financial market expectations.

Chairman Jerome Powell told reporters there was a widespread view within the Federal Open Market Committee that U.S. interest rates may need to rise quickly to a “moderately restrictive” level after the Fed announced its largest increase in the Fed Funds rate in decades. Wednesday.

“I’m only talking about MS [forecasts] for a second what it really says is that policymakers would largely like to see the policy at a slightly restrictive level at the end of this year,” he said at the press conference.

“Remember how very uncertain it is, but it’s usually a range of three to three and a half percent. That’s where people are. That’s where they want to know what we know now,” he added shortly after.

This was after the Fed raised its interest rate by 75 basis points to 1.75% and strongly signaled that it would also be likely to meet market expectations for the benchmark at the end of the year. , which have recently increased to around 3.5%.


Above: Pound to dollar rate displayed at hourly intervals with US government bond yields of 1.2 3 and six-month maturities alongside a 02-year yield. Click on the image for a closer inspection.


“I would say the next meeting could well be a decision between 50 and 75. That would put us at the end of the July meeting, in that range, in that more normal range,” Chairman Powell also said.

“It’s a desirable spot because you start to have more options as to how fast you’ll go,” he added.

The Fed became noticeably more hawkish when it suggested it would aim for a “moderately restrictive” level of interest rates by year-end.

It was a step up from the bank’s earlier tilt to a “neutral range” which is estimated to be between 2% and 3%, but financial markets had already started pricing it in after inflation s accelerated in the wrong direction with an increase of 1% to 8.6% in May.

“Contrary to expectations, inflation has again surprised on the upside, some indicators of inflation expectations have risen and projections for this year have risen significantly, so we felt strong action was warranted at this time. meeting, and today we did it,” Powell said.

The Fed said nothing on Wednesday that could be interpreted as urging the market to further raise its interest rate expectations.


Above: June summary of FOMC members’ economic forecasts. Source: Federal Reserve. Click on the image for a closer inspection.


Accelerating inflation and rising interest rates are part of the reason FOMC members cut their forecasts for GDP growth and raised their unemployment forecasts so that it now peaks at 4.1% in 2024, compared to 3.6% in March.

The forecast changes and the Fed’s deletion of a sentence from its previous statement prompted questions from reporters about what the bank’s policy actions could mean for the economy and labor market in years to come. coming.

“The sentence we removed said that we believe proper monetary policy alone can effectively drive the outcome of 2% inflation with a strong labor market and much of it really isn’t due to monetary policy,” Powell said.

“It kind of says on the face of it that monetary policy alone can do this and it just didn’t seem appropriate, so we removed the sentence,” he added.

The Fed’s statutory mandate leaves it no choice but to raise interest rates to bring inflation back to the 2% target while doing what it can to preserve as many jobs as possible.


Above: May 2022 Fed Policy Statement with deleted sentence highlighted. Click on the image for a closer inspection.


However, the Fed’s task is complicated by the nature of the inflation at work.

“There are pathways to do this, but those pathways have become much more difficult due to factors beyond our control. I am thinking of the fallout from the war in Ukraine, which has led to soaring prices for energy, food, fertilizers, industrial chemicals, as well as supply chain disruptions in general, which have been larger and longer than expected,” Powell said. .

Inflation has been lifted across the world over the past year by reduced availability of crucial items like fossil fuels, energy, food, and some manufactured goods, among others.

These “supply-side” deficits are, so to speak, the domain of Congress and the White House, but the resulting inflation has left the Fed stuck between a rock and a hard place.

“The stance of monetary policy doesn’t affect those things,” Powell said.

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