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FOMC preview – Powell to hike rates, but what comes next?

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Markets and investors are preparing for the first Fed rate increase since the pandemic, with further increases likely as the year goes on.

FOMCSource: Bloomberg
 Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 15 March 2022 

In many ways, this meeting is not really about the first-rate increase. This is viewed as a near-100% certainty by markets, but the bigger questions are what comes next, and how will inflation react. This rise in the prices is putting pressure on homeowners, and further rises in interest rates will only exacerbate this pressure.

25 basis point increase in rates expected

The most recent testimony from Powell suggested he would support a 25 basis point (bp) increase, but not a 50-basis point move. The outbreak of war in Ukraine has only increased the uncertainty around the global economy.

Surging commodity prices have sent global inflation skyrocketing, and now the talk is of a possible recession for the US and the global economy. While this may be a way off yet, there is now a real possibility of a slowdown.

What comes next?

At present, investors expect The Federal Reserve Bank (Fed) to continue hiking rates throughout the year. But this time around, the FOMC may not move in the measured, 25-basis point fashion that it did during its last hiking cycle, before the COVID-19 pandemic.

This time around, the Fed may have to be more aggressive in its moves. With inflation surging because of oil prices, consumers are feeling the pinch. But this is not the 1970s—the economy is less vulnerable to rising oil prices than it was, although it will still feel its effects.

For now, it looks like the Fed will stick to a progression of 25 basis point increases. If inflation keeps rising, however, that will change.

What does the Fed think about the economic outlook?

Compared to 2021, when rates were not expected to move until 2023, the situation looks very different. Updated economic projections will be issued at this meeting, and we will get a chance to see how the committee views the outlook for the economy and inflation.

This is a highly-fluid situation, so these forecasts may change significantly. Nonetheless, the Fed’s views will be closely-watched by investors.

US dollar outlook

The dollar has enjoyed a substantial rally into March and into the early days of the month. However, it may now be at risk of a short-term decline in the wake of the meeting. The wide gap between the price and the (rising) 50-day DMA at 0.9635 could be filled in the event of a near-term pullback.

Nonetheless, the broader uptrend is still in place, with the latest rally having established a clear higher high. A pullback towards the 50-day simple moving average (SMA) would establish a higher low and leave the uptrend intact.

USD indexSource: ProRealTime
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