- Commentary from Fed officials on interest rates and inflation outlook will be closely scrutinized this week.
- Fedspeak could help reverberate the market expectations for a September rates on-hold decision.
- Fed rate outlook could significantly impact the value of the US Dollar across its major rivals.
Federal Reserve (Fed) policymakers are set to make their scheduled appearances on Tuesday, as full markets return, anticipating the release of the high-impact US PCE inflation due later this week.
Meanwhile, the US Dollar remains under moderate selling pressure so far this week, extending Friday’s downside, fuelled by an unexpected easing in UoM 5-year Consumer Inflation Expectations for May. The reading came in at 3.0%, down from April’s 3.1% and below the market consensus of 3.1%.
Markets are pricing in a 50% probability that the Fed will hold interest rates in September, according to the CME Group’s FedWatch Tool. In the past week, Fed policymakers leaned in favor of a cautious stance on the inflation outlook, raising concerns amongst the market participants on potential Fed rate cuts this year.
Looking ahead, In the early American session, Federal Reserve Bank of Minneapolis President Neel Kashkari speaks and participates in a panel before the Barclays-CEPR International Monetary Policy Forum. Later on, Fed Governor Lisa Cook and San Francisco Fed President Mary Daly will take up the rostrum to share their thoughts at a panel discussion titled “AI and the Economy” at an event hosted by the Federal Reserve Bank of San Francisco.
Fed officials’ recent comments
Fed Governor Michelle Bowman noted on Tuesday that she would have supported either waiting to slow QT pace or a more tapered slowing in balance sheet run off,” while adding that it is” important to keep reducing balance sheet size to reach ample reserves as soon as possible and while economy is strong.”
Meanwhile, Cleveland Fed President Loretta Mester did not touch upon the topic of monetary policy. She expressed her take on the Fed communications, noting that it “would be preferable for FOMC statements to use more words to describe the current assessment of the economy, how that influences the outlook and the risks to that outlook.”
Economic Indicator
Personal Consumption Expenditures – Price Index (YoY)
The Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
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Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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