The Fed's Powell Not Convinced Interest Rates are High Enough

Jerome Powell's statement lifted the USD against most major currencies. However, the US Dollar Index rally stalled this morning.

Federal Reserve Chair Jerome Powell revealed that policymakers are "not sure" if interest rates are already high enough to reach the desired inflation target. This hawkish statement boosted the USD against most major currencies at the end of the New York session. However, the US Dollar Index (DXY) rally stalled around 105.90 as of the time of writing in the Asian session today (November 10th).

"My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2 percent has a long way to go," he said.

"We will keep at this until we succeed," he later added, saying the Fed is focused on whether rates need to go higher and how long they need to stay elevated.

Powell emphasizes that inflation is still "well above" The Fed's target. He and his colleagues will keep monetary policy tight until they successfully bring inflation down to the 2 percent target consistently. He also acknowledges various risks that could mislead them in the future, emphasizing the importance of caution.

Powell emphasized that if further policy tightening is considered necessary, they will not hesitate to implement it. He further stated that they would proceed with caution to navigate the risks associated with potentially being misled by a few months of positive data and the danger of excessive tightening.

Powell's statement failed to alter market confidence that the Fed will not raise interest rates again shortly. Data from CME Group indicates a probability of less than 10% for a Fed interest rate hike at the upcoming FOMC meeting on December 12-13.

The likelihood of an interest rate increase in January 2024 has only marginally risen from 19% to 25%. Meanwhile, market participants continue to speculate that the Fed may begin cutting interest rates in the middle of next year. Analysts argue that Powell did not introduce any new discourse.

Vassili Serebriakov, an FX strategy expert at UBS New York, stated that he believes Powell did not introduce anything significantly new, but the market perceives his comments as somewhat hawkish. He also expressed the opinion that the interest rate market remains somewhat jittery after the auction, making yields more susceptible to increase, as reported by Reuters.

The United States government held an auction for 30-year bonds yesterday, but the mass media reported very weak buying interest for these long-term bonds. As a result, there was an increase in yields for U.S. bonds with various maturities. The U.S. dollar typically strengthens when bond yields rise.