US Fed to pursue disinflationary measures

USD

The dollar gained back some of its losses yesterday afternoon but continued to remain under pressure as markets still have eyes firmly on how the US central bank will look to pursue interest rates hikes going into the December meeting. Federal Reserve policymakers stated yesterday that it will be soon time to slow the pace of interest rate hikes for the central bank to assess the economic landscape.

Instead, due to a tight labour market, James Bullard President and CEO of the St. Louis Fed said that this gives the Fed a license to pursue a disinflationary strategy now. This term is commonly used by the Fed when it wants to describe a period of slowing inflation. Unlike deflation, this is not harmful to the economy because the inflation rate is reduced marginally over a short-term period.

New York Fed President John Williams also added that he believes the Fed will need to raise rates to a level sufficiently restrictive to push down on inflation, and keep the rates there for all of next year.

Earlier this month, the Fed delivered its fourth straight 75 basis points rate increase and pushed borrowing costs to the highest since 2008 to tame high inflation. Money markets are now pricing in a 70% chance that the central bank would deliver a smaller 50 bps rate hike in December.

GBP

The pound has rallied against the dollar through November while recovering against the euro and looks set to end the month broadly unchanged. Much of this recovery is linked to ongoing improvements in global equity markets, to which Sterling has positively reacted and concerns regarding the UK have faded since Prime Minister Rishi Sunak reset the country’s fiscal path on his arrival in 10 Downing Street.

The Bank of England raised interest rates in an attempt to reduce the annual inflation rate, which at the time sat at 10.1%. However, the rate of inflation in the UK has risen further and now sits at 11.1%, the highest level for forty-one years. The market is therefore pricing in further interest rate hikes in 2022 and 2023. Markets are predicting that the BoE base rate will rise above 4% in early 2023 and as high as 4.8% by July 2023. That would mean the interest rate on the best two-year fixed rate mortgage will jump to around 6%.