FOMC Review on a Strong USD

Federal Reserve Chairman Jerome Powell recently addressed several crucial points during his latest speech at this morning.

You can watch the full speech on here: https://www.youtube.com/watch?v=poHpPUUOfkg&t=3776

You can jump to 1hr as it starts only there.

He began by acknowledging that the benchmark interest rate is already in restrictive territory, setting the stage for discussions on the delicate balance needed in monetary policy. Powell emphasized the importance of caution in reducing policy restraint, underscoring the potential risk of reversing progress made in controlling inflation.

Looking ahead, Powell expressed the view that it would likely be appropriate to initiate rate reductions later in the year. This forward-looking perspective indicated the Federal Reserve's readiness to adjust policies based on evolving economic conditions. Powell also hinted that the policy rate might have reached its peak, suggesting a potential shift in the central bank's stance.

Despite considering rate reductions, Powell emphasized their commitment to maintaining the current policy rate for an extended period if necessary. This nuanced approach reflects a willingness to adapt to changing circumstances while avoiding premature or drastic policy adjustments. Powell conveyed confidence in the committee's ability to achieve the inflation target, highlighting a shared belief among members that rate cuts would be appropriate.

While Powell acknowledged that the committee is not actively seeking weaker employment, he noted their willingness to consider rate cuts in response to signs of economic weakening. He tempered any optimism about the current economic state, cautioning against premature celebration and emphasizing that a smooth landing has not yet been achieved. Powell attributed a significant portion of the present economic growth to post-pandemic recovery, anticipating a more pronounced impact when this factor fades.

Addressing concerns about inflation, Powell stated that any resurgence would be a surprise now. He set expectations for inflation to stabilize around 2%, clarifying that the goal is not merely to hit 2% momentarily but to maintain stability at that level.

In addition to these insights into monetary policy, Powell's comments on Fed Swaps had a notable impact on market expectations. He signalled reduced chances of a rate cut in March, contrary to some market speculation. Futures traders responded by decreasing their bets on Fed rate cuts in March following Powell's statements. This shift in expectations has reshaped the market landscape, with rate cuts from the Fed now anticipated from May based on future interest rate prices. The Fed Swaps have effectively diminished the likelihood of a March rate cut to around 30%, marking a substantial change in market sentiment.

CME FEDWatch Tool

Source: CME

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