The FED has been in a hawkish period since late in 2021, delivering the fastest rate hikes in history during 2022. That has been keeping the USD bullish and was hurting the sentiment in financial markets, as such tightening policy was heading the global economy toward a recession.

But the US economy started showing weakness last year and recently inflation has cooled off as well, with the headline CPIU (consume price index) falling to 6.5% in December as last week’s report showed, which sent the USD crashing. So, the FED has started to soften up, slowing down to a 50 bps hike in December after several 75 bps hikes in previous meetings. The producer inflation is slowing as well, which will furth weaken consumer inflation in the moths ahead.

US December 2022 producer price data

• December PPI YoY 6.2% vs 6.8% estimated
• November PPI YoY 7.4% YoY revised to 7.3%
• PPI MoM -0.5% versus -0.1% expected
• Prior month PPI MoM 0.3% revised 2+0.2%
• Core PPI ex. food and energy YoY 5.5% vs 5.7% expected
• Core PPI ex. food and energy MoM 0.1% vs 0.1% expected
• Prior core PPi ex food and energy MoM 0.4% revised+0.2%
• Final demand goods prices -1.6%. Largest decrease since .1 .8% in July Goods ex food and energy +0.2% services +0.1%
• Final demand services prices rose 0.1% in December after rising 0.2% in November. A major factor in December increase in prices for final demand services was a 17.6% jump in margins for fuels and lubricants retailing

So, the FED is slowing and they will stop rate hikes at some point. Although the question is if they will plateau and hold there or reverse interest rates down. Morgan Stanley economist expects the Federal Reserve to cut when CPI drops to 3% range,