The landscape in financial markets after yesterday's statements by Jerome Powell, head of the Federal Reserve: the EUR/USD falls below 1.1200 and the price of an ounce to 1810 USD.
After the two-day meeting, the Federal Reserve did not change the interest rates in the US. However, the press conference of the Fed chief turned out to be crucial for the market reaction. Jerome Powell said yesterday that it will soon be appropriate to raise the target range for the federal funds rate, as inflation is well above the 2% level and the labour market is strong enough for interest rate hikes not to hurt it.
Ending asset purchases as early as March?
Starting in February, the U.S. central bank will reduce its asset purchase program to $30 billion per month and may end it as early as March. Meanwhile, the reduction of the $8.9 trillion balance sheet will begin after the interest rate hike, and the Fed intends to reduce its holdings of securities over time by adjusting the amount of reinvested capital payments, according to the statement.
During a virtual press conference, Powell said the FOMC believes it will raise the Fed funds rate at its March meeting if conditions are right. Powell also did not rule out the possibility of interest rate hikes at any future Fed meeting.
Next decision in March
The interest rate market thus began to price in the possibility of no longer three or four rate hikes in 2022 in the US, but as many as five. This shift in the expected interest rate for the US dollar can be used to explain its current strengthening on global markets. However, it should also be remembered that such an aggressive path of hikes may soon be discounted by the market and without new stimulus it may be hard to maintain current trends.
The next Fed decision will be announced on March 16, when the new FOMC macroeconomic projections will also be released. They may define the expectations for the labor market, inflation, GDP and interest rate level at the end of 2022.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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