- The Federal Reserve has doubled the pace of tapering to $30 billion.
- Median Fed forecasts show three hikes in 2022, higher than expected.
- An open door to a hike in March could further boost the dollar.
This is what it sounds like when the doves cry – monetary policy was unlikely on Prince's mind, but his famous 1980s song reflects the Federal Reserve's decision as it confronts 1980s-style inflation. The Fed expects three rate hikes in 2022. That is more than expected and a sharp hawkish shift from September.
The dot plot comes on top of the expected policy announcement – a doubling of the taper pace from $15 to $30 billion. With current bond-buying standing at $90 billion, the announcement implies the Fed would conclude the process in March.
"Beware the Ides of March" – a warning to Julius Ceasar over 2,000 years ago is relevant for 2022 when the Fed could raise rates, contrary to pre-decision estimates of a 67% chance of a hike in May.
Inflation could still fall in the next three months, amid easing in supply chains and falling oil prices. However, the mere threat of a hike in March will likely keep the dollar bid through year-end – enjoying a Santa Rally of sorts.
Markets could practice caution around Fed Chair Jerome Powell's press conference, but when the dust settles, the greenback could gain further ground.
What about stocks? The initial reaction is positive, as investors are trained in "buying the dip." Even if shares suffer some jitters, the urge to buy shares of companies making money could outweigh the fears of higher rates. Moreover, the Fed could be seen as giving inflation a good fight, thus providing stability. Stocks love stability.
Overall, the dollar could gain ground while the stocks could struggle before advancing.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.