US dollar supported as Fed officials call for more rate hikes to fight inflation

The U.S. dollar is trading flat early Wednesday after posting choppy, two-sided trade in the previous session despite hawkish comments from several Federal Reserve policymakers.

The greenback is slightly lower against the euro and the Japanese yen, but slightly higher against the British pound. The subdued price action is the result of traders monitoring central bank activity and the impact on global economic growth of their aggressive efforts to bring inflation down.

December US Dollar Daily Index

Dollar backed by Hawkish Fed members

With the Dollar Index sitting just below a two-year high at 114.445, trading activity suggests that higher prices may continue, especially with Federal Reserve officials ignoring the pain of the stock market all calling for the need for further rate hikes.

Minneapolis Federal Reserve Chairman Neel Kashkari was the latest hawk to speak his mind when he said in an interview with WSJ Live on Tuesday that the Fed must continue to tighten until it is evidence that core inflation is falling, then should pause and “let the tightening work”. his way through the economy” to see if he’s done enough.

Early Monday, Susan Collins, the new president of the Federal Reserve Bank of Boston, endorsed the Fed’s projections released last week that indicated its benchmark interest rate would rise to 4.6% by the year. next, up sharply from around 3.1% currently.

Later, Cleveland Fed President Loretta Mester said, “When there is a lot of uncertainty, it may be better for policymakers to act more aggressively, because aggressive action and preventive action can prevent the worst results from occurring.

Avoiding recession will be a challenge

Comments from the three Fed policymakers have contributed to the ongoing debate over how big the Fed’s rate hikes — the fastest in more than 40 years — will hurt the economy. By raising its benchmark rate, the Fed is making mortgages, car loans and credit cards more expensive for consumers and businesses.

Boston Fed Chair Collins acknowledges growing concerns about a recession, but she thinks “the goal of a more modest, albeit difficult, downturn is achievable.”

Other Fed officials are hoping their rate hikes will result in a “soft landing” by slowing consumer and business spending enough to bring inflation down, but not so much as to cause a recession. However, many economists are increasingly skeptical about the likelihood of such an outcome. They think the United States could face a recession next year.

Fed Chairman Jerome Powell even acknowledged that “the chances of a soft landing are likely to diminish” as the Fed steadily raises borrowing costs.

“No one knows if this process will lead to a recession or, if so, how big that recession would be,” Powell said.

Short-term outlook

There has to be a slowdown in the economy to get inflation under control and the Fed sees rate hikes as the way to do that. This will support the US dollar until the Fed slows the size and pace of rate hikes, allowing other policymakers like the European Central Bank to catch up.

Even a US recession is unlikely to be enough to weaken the dollar, as other economies are already heading there, such as the eurozone. Additionally, a global recession will likely enhance the greenback’s appeal as a safe-haven asset.

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