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The Federal Reserve's New Stance


12 November 2021

Last week the market concentrated on two major events. The first relating to the Central Bankand the second regarding the employment sector. The two events increased the volatility level in the market and saw the US Dollar Index increase by 0.35% towards previous price highs. The question traders are now asking is whether the Dollar will maintain its price movement. Let’s take a look at the latest developments

The Federal Reserve – Quantitative Easing

The market had expected the regulators to act regarding the high rise in inflation. It has previously been hinted by the Chairmen that any alterations are likely to start with the Quantitative Easing Program. Last week it was made official, the Federal Reserve advised it would begin scaling back its gigantic $120bnmonthly bond-buying programme later this month.

The program was originally introduced in order to keep liquidity high within the market and as a result for interest rates to also remain low. Both are known to encourage economic activity and promote employment. Both was necessary according to the USA’s main bankers as the unemployment rate increased to almost 14%. However, with the interest rates so low and the supply at record highs, the US Dollar took a hit.

Moreover, representatives of the department emphasized that the final reduction of the program is planned for the middle of 2022, but this does not mean that the central regulation will automatically start raising interest rates. As for inflation, officials still consider its rapid growth to be a temporary occurrence, although it may last a far longer than previously predicted. The head of the US Fed Jerome Powell expressed confidence that the decline in consumer prices will begin from the middle of next year. The US Treasury Secretary has also advised that the high levels of inflation are likely to subside during 2022 providing that no further restrictions are imposed.

Is Federal Reserve outcompeting?

The market sees the monetary policy as a battle between the Central banks within regards to higher and stable interest rates. The Federal Reserve has taken the first step within regards to altering the Quantitative Easing, however, the Bank of England has advised their interest rates are likely to increase within the coming months.

The Bank of England Governor has advised the markets during his press conference that the main reason the committee surprised markets last week by keeping rates low of was that it wanted to gather more information. He advised further information is required regarding how the employment sector reacted to the end of the COVID related unemployment benefits.

NFP improving conditions?

The employment figure for the US was confirmed on Friday as much higher than originally expected by Wall Street. The economy added a further 531,000 new employed persons, 85,000 more than expected. In addition to this, the unemployment rate declined for a fourth consecutive month to 4.6% which is 0.2% lower than September and the lowest since the rate rose in 2020. Both largely supported the US Dollar as they are both deemed to be high price driving statistics

Over the past 6 months the Fed has at times taken a dovish stance while at the same time accepting the need for inflation to be monitored and potentially controlled. However, the dovish stance was taken due to the employment sector which remained far behind the economy’s target. The employment sector has now strongly improved and as the sector strengthen further support is provided towards the US Dollar.

This week the US is also due to announce their Price Purchase Index as well as the Consumer Price Index. Both are related to inflation and the market will be closely monitoring the level of inflation. The inflation rate currently sits at 5.4% which is the highest in 13 years. The level of inflation is also likely to affect the price of the US Dollar. The higher the inflation climbs the higher the chances of the regulator altering the policy which again can influence the price of the US Dollar.

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