Fed in a race against time to raise rates
As the next FOMC meeting looms, markets are wondering whether the Fed can keep tightening even as the economy begins to stagnate.
What to expect from the FOMC meeting
The upcoming Federal Reserve (Fed) meeting in May is expected to see a 50-basis point (bp) hike, the biggest in over two decades.
What else might the Fed say?
The 50-point move has become the market’s basic expectation in recent weeks, since chairman Jerome Powell said that such a move would be appropriate. However, as with all meetings of central banks the real market-moving event is likely to be any suggestion that some policymakers will be calling for an even faster pace of rate hikes.
This would likely put further upward pressure on the dollar, which has already moved to a near-20-year high as the Fed looks to battle rising inflation.
Strong US economy helps the Fed’s plans
For now the US economy is still in reasonably strong form, although the 1.4% contraction in first quarter (Q1) GDP according to the first estimate of data will raise worries that a recession could be on the cards soon. Consumer spending has yet to turn solidly lower however, although real pay continues to fall, raising the prospect of a crimping of consumer outlays in the near future.
But inflation continues to rise strongly. March’s price increase was 8.5% year-on-year (YoY), and so the Fed still has work to do. Ideally, the central bank would like to get rates back towards 3%, in order to give them some reasonable firepower when the next economic downturn hits and rates need to be cut to support the economy.
As we move into the middle of 2022, the Fed has a tough balancing act to perform, as it looks to get control over inflation without tipping the economy into recession.
US dollar outlook
The past month has seen the biggest surge in the US dollar since 2014. The dollar basket has rallied back to highs last seen in 2016 and 2020, building on the gains seen since the 90 level back in the middle of 2021.
A break higher now looks to be on the cards, unless the Fed provides a more cautious outlook in the short term, or perhaps if the Federal Open Market Committee (FOMC) does not see further calls for a faster pace of tightening. Given the scale of the gains in April, the price does look overextended, and a drop below 100 would mark a short-term top.
Take your position on over 16,000 local and international shares via CFDs – and trade it all seamlessly from the one account. Learn more about trading share CFDs with us, or open an account to get started today.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Start trading forex today
Trade the largest and most volatile financial market in the world.
- Spreads start at just 0.6 points on EUR/USD
- Analyse market movements with our essential selection of charts
- Speculate from a range of platforms, including on mobile
Live prices on most popular markets
- Forex
- Shares
- Indices
See more forex live prices
See more shares live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.
See more indices live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.