Powell Quick Analysis: US economy is on fire, war could impact policy both ways, dollar to rise


  • Fed Chair Powell has stressed that the labor market is extremely tight. 
  • Russia's war has received a nod, but policy conclusions are unclear.
  • The dollar is set to rise amid the current market pricing of looser policy. 

The Fed is far from hitting the panic button – that is the conclusion from Federal Reserve Chair Jerome Powell's prepared remarks to Congress. It contrasts with markets and could lead to further dollar gains.

Follow all the updates on Russia-Ukraine and the market impact

Powell has dedicated several comments to Russia's brutal invasion of Ukraine, but clarified that the impact to the US economy is "highly uncertain." Another comment is that "making appropriate monetary policy must recognize the economy evolves in unexpected ways" and that the bank will be monitoring the situation. There is nothing to suggest any change. 

Moreover, the only clear impact of the nearly weeklong war is that the price at the pump is set to surge. WTI Crude Oil surpassed the $100 level and hit a high of $112, even before Russia disrupted any supplies of the black gold. That is inflationary, suggesting more rate hikes. 

The Fed already witnessed how higher energy costs and supply chain disruptions propagated into higher prices of everything – from rent to manufactured goods and services. Therefore, it is not only headline inflation that is set to rise but also underlying prices. 

Another scenario is that the war triggers a global recession and forces the Fed to enact looser monetary policy – but that is nowhere to be seen in the text. On the contrary, Powell said the labor market is "extremely tight and that wages are rising at the fastest pace in many years. That is a picture of a steaming hot economy that creates inflation.

As tanks roll over Ukraine, investors seem to have forgotten about COVID-19, but Powell has offered a quick comment on that – saying the Omicron variant has had a minor impact on the economy. To conclude, Powell clarifies it will be appropriate to raise rates in March. 

Is a double-dose 50 bps increase to borrowing costs on the table? Not according to bond markets, nor to Powell – he does not mention it. Nevertheless, the Fed Chair and his colleagues are set to publish their "dot-plot" where they are likely to signal a faster pace of hikes. 

Overall, Powell is bullish on the economy, noncommittal about the war, and ready to raise rates. For stocks, that is an adverse development amid the global turmoil. The dollar is already on high ground but could go higher. The greenback advanced despite a drop in US bonds yields, which could now advance in response to the Fed's updated stance. 

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


Recommended Content

Editors’ Picks

EUR/USD recovers toward 1.0650 ahead of US inflation data

EUR/USD recovers toward 1.0650 ahead of US inflation data

EUR/USD has found fresh demand and marches toward 1.0650 in European trading on Wednesday. The pair capitalizes on renewed US Dollar retreat but the further upside appears capped amid Germany's political instability and a cautiou market mood. Traders await US CPI data and Fedspeak for fresh directives. 

EUR/USD News
GBP/USD struggles near 1.2750, awaits US CPI report

GBP/USD struggles near 1.2750, awaits US CPI report

GBP/USD is struggling at around 1.2750 in the European session on Wednesday, unable to find any fresh impetus. Traders turn risk-averse and refrain from placing fresh bets on the pair ahead of the critical US CPI data and speeches from several Fed policymakers. 

GBP/USD News
Gold price holds above $2,600 mark, bulls seem non committed ahead of US CPI

Gold price holds above $2,600 mark, bulls seem non committed ahead of US CPI

Gold price staged a modest recovery from a nearly two-month low touched on Tuesday. Elevated US bond yields and bullish USD cap gains for the non-yielding XAU/USD. Traders now look forward to the key US Consumer Price Index report a fresh impetus. 

Gold News
US CPI data set to confirm inflation ramped up in October as traders pare back Fed rate cut bets

US CPI data set to confirm inflation ramped up in October as traders pare back Fed rate cut bets

As measured by the CPI, inflation in the US is expected to increase at an annual rate of 2.6% in October, a tad higher than the 2.4% growth reported in September. The core annual CPI inflation, excluding volatile food and energy prices, will likely remain at 3.3% in the same period.

Read more
Forex: Trump 2.0 – A high-stakes economic rollercoaster for global markets

Forex: Trump 2.0 – A high-stakes economic rollercoaster for global markets

The "Trump trade" is back in full force, shaking up global markets in the aftermath of the November 5th U.S. election. This resurgence has led to substantial shifts in both currency and bond markets, with the U.S. dollar index (DXY) jumping 2.0% + since election day.

Read more
Best Forex Brokers with Low Spreads

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.

Read More

Majors

Cryptocurrencies

Signatures