Hawkish FED Talk, Keeps the USD Bullish

The FED turned quite dovish in Q4 of last year, hinting on upcoming rate cuts, which was the first of the major central banks to do so. That sent the USD tumbling, but it has now reversed course together with the FED. We have seen many FED members sound hawkish in recent weeks, as the US economy shows signs of rebounding strongly this year.

Today we had a number of central bankers speaking, with the FED speakers keeping the hawkish tone once again, as shown from Kashkari’s and Gooslbee’s comments below. The USD was pushing higher all day, but it is now grinding lower, making a retrade before resuming the bullish momentum later on.

Comments by Minneapolis Fed President, Neel Kashkari

1. Possibly Higher Neutral Rate:
   • The suggestion that there might be a higher neutral rate implies that the Federal Reserve could take more time to assess upcoming data before considering rate cuts. The neutral rate is the interest rate that neither stimulates nor restricts economic growth.
2. Monetary Policy Considerations:
   • With a higher neutral rate, monetary policy may not be perceived as being as tight as previously thought. This could be seen as a potential positive for the economic recovery.
3. Less Risk to Economic Recovery:
   • The idea that monetary policy may not be as tight could entail “less risk” to the economic recovery, indicating a cautious and accommodative stance.
4. Core Inflation Progress:
   • Core inflation is mentioned as making “rapid progress” towards the Federal Reserve’s target. Core inflation typically excludes volatile items like food and energy.
5. Mixed Economic Data:
   • Despite progress in core inflation, the economic data is not described as “unambiguously positive,” suggesting a nuanced and cautious assessment.
6. Signs of Weakness:
   • Specific signs of weakness are mentioned, including rising consumer delinquencies. This indicates potential concerns about the financial health of consumers.

• Full remarks

Meanwhile, FED’s Gooslbee said on Bloomberg earlier that the odds of lowering interest rates in March are pretty slim, since the economic situation looks solid, with inflation decreasing, despite robust employment and GDP growth.

He underlines the need for more economic reports before the FED takes a decision, hoping to leave more room for the FED. The Federal Reserve’s aim is to achieve a 2% inflation rate, which is likely assessed by the Personal Consumption Expenditures (PCE) index. The inverted yield curve is addressed, and it is stated that it is not currently useful as a recession indicator.