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14.03.2022 11:57 PM
Another Fed mistake could cost the dollar dearly

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In the coming days (March 15-16) The Federal Reserve will hold a historically important meeting at which it will raise rates. If there is no doubt about the increase itself, then the question of how much the central bank will increase the rate continues to worry the markets.

Fed Chairman Jerome Powell signaled a rate hike of a quarter percentage point during the March meeting. However, it is worth considering that this was promised before the release of February inflation, which amounted to 7.9% in annual terms. In addition, the key indicator of inflation expectations in the US rose to 3% and approached record highs.

All this not only strengthens expectations of a 25 basis point rate hike this week, but also signals more. There is a possibility of a sharp reaction from the Fed to inflation, that is, the rate may be increased by more than a quarter of a percentage point. Market players also hope to get new information on the monetary policy rate through the presented dot chart. The points are expected to be mostly grouped around four or five increases over the course of the year, up from three previously.

Why could a rate hike end up being more abrupt and precipitous? The fact is that the inflationary picture, including the global economic one, is changing rapidly, and the rhetoric of the Fed leadership is not keeping pace with the changes. In addition, it takes time to get used to certain realities and new financial and economic conditions.

Recall that less than a year ago Powell stubbornly insisted on the transitive nature of inflation. Not so long ago, he admitted his short-sightedness and said that he should have acted earlier. Economist Mohamed El-Erian called his persistent denial of problems with inflation a "historical mistake", his point of view was shared by many leading economists, including former Secretary of the Treasury Larry Summers. For many months, the financier has been calling for an active containment of price pressure.

Another question arises. How many more mistakes can the Fed make? Will it be a mistake that on Wednesday the rate, as Powell said, will be raised by 25 basis points? Many FOMC members consider such an increase insufficient in the current inflationary realities and openly talk about the need to increase the rate by half a percent at once. Will Powell take these statements into account, or, as in the case of rolling inflation, will he defend his softer position?

Financiers and economists see part of Powell's problem in the fact that he is a lawyer who made a fortune in private equity. In his decisions, he relies on the economists of the central bank and their models.

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Many still wonder why the head of the Fed called rising inflation a temporary phenomenon. This phenomenon was recently clarified by the Wall Street Journal.

At Nova Southern University in Florida, scientists carried out painstaking work, more than 750 central bank economists were compared with the voter registration database. The dominance of the "left" is revealed, the overall ratio of Democrats and Republicans among the system economists of the central bank is 10.4 to 1. Even more interesting is the ratio in the Washington Board of Governors, which reaches 48.5 to 1. These are the economists who provide officials with information on the basis of which decisions on monetary policy are made.

The Fed disavows the phrase "politicized", when in fact it is.

Meanwhile, on the issue of inflation last week, the former head of the Fed, now Secretary of the Treasury Janet Yellen, spoke out. Even she announced the prospects of maintaining high inflation for another year, although this goes against the rhetoric of the White House.

What about the dollar?

A period of increased volatility is expected for the dollar, but its stabilization is likely by the end of the first quarter. Surges in the US currency will mainly cause news on the Ukrainian situation.

In general, the trend for the growth of the dollar is not in doubt, its growth will continue. In the long term, the forecast of its long period of strengthening remains. Wells Fargo economists believe that the Fed will raise rates at a faster pace than other central banks. Meanwhile, financial markets may be too aggressive in pricing expectations of tightening by other foreign central banks. As investors will still adapt to the slower pace of rate increases outside the US, the dollar should continue to dominate against most currencies.

On Monday, the dollar index held the defense near the 99.00 mark. A breakdown has occurred, but this does not mean that it will not be able to pay a visit to the next high now.

The dollar index retains the potential to reach this year's peak at 99.41, followed by the 99.97 bar, and then the psychological mark of 100.00.

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Natalya Andreeva,
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