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Angry Voters and the Federal Reserve

Updated: Apr 19, 2023

Federal Reserve Chairman Jerome Powell is scheduled to testify before the U.S Senate tomorrow. Certainly we are going to hear the words inflation and growth mentioned, this as the Fed Chairman speaks about monetary policy and the trajectory for the U.S central bank to continue raising interest rates over the mid-term.

Via prices in the Forex market since the start of February, financial houses have likely priced in two additional interest rate hikes from the U.S central bank into the USD, one of them being a quarter of a point increase coming on the 22nd of March. The USD has been mostly stronger across the board the past four weeks. This week's coming Non-Farm Employment Change numbers and Average Hourly Earnings data results should be monitored on Friday.

USD Index One Month Chart

While financial houses may have accepted the interest rates to come, this doesn't change the rather complex economic data in the U.S which is demonstrating rather stubborn inflation, while also showing growth is not slowing down as much as has been anticipated. GDP numbers reported recently from the States showed only a slight decrease.

  • How much more can the U.S Federal Reserve increase interest rates over the next six months without making the USD too strong?

  • At what point will the Fed become less aggressive?

  • While an additional .50% has been 'accepted' by financial institutions, will the Fed bring the lending rate to 5.50%?

  • High inflation and limited growth could result in political quicksand for many elected officials.

The U.S Federal Reserve is going to get pressure from both sides of the aisle in Washington D.C.. Traders should not discount their perceptions that elected officials are starting to consider the ramifications of the coming elections in a year and half, because this will affect behavioral sentiment in the markets. Neither Democrats or Republicans will be happy if inflation remains a problem going into the vote. Rising costs equal less money in the bank accounts of American voters.

The U.S public has a history of voting via sentiment generated from their wallets and the power to consume. Prices that feel like they are out of control will win no friends. While energy prices seem to have calmed down in the headlines, energy costs remain a risk and concern for manufacturers worldwide. The inability to save money for individuals, and lack of profits for corporations makes for potentially angry voting results.

There is an additional problem lurking. The strong USD driven by the Federal Reserve's increased borrowing costs, the Federal Funds Rate, has weakened currencies across the world. Vulnerable currencies have spurred inflation in many nations which are producers of goods that global consumers buy, these rising prices are being imported into the U.S economy.

As much as international economic integration helps the world, the rise of coronavirus and its knock-on affects via costs were not anticipated enough, causing weaknesses to be exposed. The U.S attempted to save its skin economically by creating a massive amount of stimulus, which certainly fueled domestic inflation. The U.S might have saved the American public in the short-term, but the government faces a long climb upwards to fix the problems overspending has caused.

The rising costs of logistics and the spotty supply of commodities internationally generated higher prices in the aftermath of coronavirus. Commodity prices have become more tranquil, but the costs of production has not eased because weaker currencies globally are hurting producers who need to use the USD to purchase resources. The U.S Federal Reserve's attempt to tackle inflation with higher interest rates, has fueled 'import' inflation. This is not an easy problem to solve.

The Fed will not say in public they want the U.S economy to slow down, this acknowledgement would costs jobs which rely on political backing. The White House certainly doesn't want the economy to suffer as it prepares for an election within a year and a half, but quietly officials likely accept slower growth and perhaps recession may become inevitable. Both the Fed and elected officials are performing a delicate dance that may be interrupted any moment.

The Fed doesn't want us to remember they said inflation would prove transitory almost two years ago. The Fed needs to fight rising costs certainly, but very carefully. The desire to weaken inflation is correct but a dangerous balancing act, because the USD remains the global reserve currency.


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