Over the past several months, we have been wondering how long Christine Lagarde and Jerome Powell will be referring to the inflation currently ravaging the economy as "transitory". Indeed, delivering their speeches (and there were a lot of them in recent weeks), both policymakers have repeatedly said that inflation would go down next year. Although initially, they suggested that it would start to decrease at the end of this year. At the same time, neither Lagarde nor Powell ever mentioned how high consumer prices could rise before they begin to fall. This is actually a very important issue. Anyway, inflation keeps accelerating both in the European Union and the United States. Moreover, markets no longer trust statements made by the heads of these two central banks. By and large, rising inflation significantly increases the likelihood of monetary policy tightening in both the European Union and the United States. The ECB's Christine Lagarde insists that interest rates could be raised as early as next year. She believes that the European economy is not ready yet for the end of the quantitative easing (QE) program. Meanwhile, the Federal Reserve has started to gradually tighten its monetary policy. Therefore, the US regulator is now clearly expected to take more active steps towards tightening. As a reminder, the higher the likelihood of rate hikes and QE taper, the worse it is for the stock market and the better it is for a national currency. All in all, the greenback has been showing growth for several months. Therefore, its further strengthening is now questioned. The dollar could actually start falling as markets have already priced in the possibility of interest rate hikes next year as well as QE taper.
Yesterday, Powell gave testimony in the Senate, which was his second one in two days. However, both his speeches sounded similar. Addressing the Senate for the second time, Powell was asked when he would stop referring to inflation as "transitory". Powell explained that while the word has "different meanings to different people," the Federal Reserve "tends to use it to mean that it won't leave a permanent mark in the form of higher inflation". Powell also noted that the issue of accelerating the pace of QE taper to curb further inflation growth would be discussed at the next meeting. Markets suggest that the pace of monthly asset purchases would be reduced to $30 billion. Powell's speech triggered a decrease in the leading stock indices - the S&P 500, the NASDAQ, and the Dow Jones - and boosted the greenback.The material has been provided by InstaForex Company - www.instaforex.com