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Powell Authorized to be Hawkish on U.S. Interest Rates

In: Finance, Forex

Fed Chair Powell has been given license to be hawkish by President Joe Biden, but this has politicians, bankers, households and business owners worried about the possibility of facing a similar scenario to the one in 1970 which crippled the economy.

Powell’s press conference on Wednesday will be analyzed for clues as to how high rates could ultimately go from around zero today and how quickly officials may try to get there. Last week’s meeting of the European Central Bank showed the potential for hawkish surprises when President Christine Lagarde announced a more accelerated wind-down of monetary stimulus. The Bank of England is also set to lift rates this week for a third straight meeting.

The Federal Reserve will this week begin a multi-month campaign to conquer inflation that could see Chair Jerome Powell moving even more aggressively later on, after originally anticipating an increase of 25 basis-points.

Already struggling to tighten monetary policy amid the fastest consumer price gains in 40 years, Chairman Powell and colleagues now have to deal with the economic impact of the war, which threatens the U.S. economy with weaker growth and an even faster inflation.

With a 25 basis-point hike almost certain on Wednesday after Powell took the rare step of publicly backing such a shift, futures markets show around 165 basis points of tightening this year. The cost of food, fuel and metals has elevated since the war began with gasoline alone at a record high, while prices for many services were already higher. There’s certainly reasons to be worried about inflation as Russia’s invasion compounds the pressures initiated by the pandemic.

A survey from the University of Michigan on Friday showed Consumer Sentiment falling to the lowest since 2011. That puts the focus on whether Powell signals towards a more hawkish or easier path of tightening, or keeps his options open by talking about the need for flexibility amid uncertainty. It’s not an easy call. Forecasters expect the economy to slow this year with fiscal spending shrinking.

Either direction taken is crucial for the future of the U.S. economy. The Fed’s mission to keep inflation within the 2% bound seems increasingly doubted by the public opinion and no Fed official is yet willing to talk about tilting the economy into a recession to control inflation. However unlikely, is an option that can’t be discarded.

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