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Winter hawk cry: Powell spooks the market

On January 26, the FOMC kept the federal funds rate steady in the range of 0-0.25%. The post-meeting statement turned out to be quite restrained, given that the regulator intends to reduce asset purchases on the open market by $20 bln (UST) and $10 bln (MBS) starting in February, and wind up QE in early March. “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate”, the central bank said in a statement at the end of its two-day meeting. The Fed also noted that it will be ready to adjust monetary policy if external risks interfere with the implementation of its goals.

Although the tone of his statement was restrained, Fed Chair Powell’s remarks at the press conference gave a shot in the arm to the dollar and spooked other, already frightened, currencies, as well as the US stock market. Thus, he said that the FOMC intends to raise interest rates as soon as the March meeting and does not rule out interest rate increases at every FOMC meeting this year. Powell went on to say that following the rate liftoff, the Fed could start running off its balance sheet, although the timing and scope of such a move have not yet been decided. Thus, Powell made it clear that, first and foremost, the Fed will devote all its efforts and resources to combating inflation, even to the detriment of financial markets, and second, a strong dollar is still of great importance to the regulator.

Over the next couple od days, the EURUSD pair could sink to $1.1186, although the sharply depreciated euro could start to strengthen from that level if supported by a positive news flow.

 

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