25.10.202107:20 Forex Analysis & Reviews: Loretta Mester supports Fed hawks

At the end of last week, Jerome Powell was not the only speaker. Other Fed members also shared their views on the current situation with the markets. Notably, all Fed members are required to maintain a silence mode two weeks before the Fed meeting. Therefore, last week was the last opportunity for them to give interviews and speeches covering monetary policy issues. Besides, at least five members of the Federal Reserve Board, in particular Raphael Bostic and James Bullard, have repeatedly expressed their views on the earliest possible tapering of the QE program. Last week, Cleveland Fed President Loretta Mester voiced similar rhetoric. She highlighted that Fed members should start to cut stimulus soon. However, Loretta Mester noted that the Fed would not increase interest rates in the short term. Consequently, in this thesis the rhetoric of Meister and Powell coincides completely. However, it is a matter for certainty. Jerome Powell, who also speaks quite often, has regularly emphasized that he was likely to back tapering of QE. However, he was not certain that it would happen in November. Moreover, the near term is vague. So, the markets still expect QE to end in November, though it might also occur in December.

Besides, Loretta Mester said that a rate hike is not on the agenda at the moment. She noted that more inflationary pressure is related to the coronavirus pandemic and it will begin to weaken over time. By the time the Fed starts to reduce QE, there will be enough time to assess the inflation and labor market and make adjusted decisions. At the same time, Mester believes that supply chain disruptions will last longer than expected a few months ago. According to Loretta Mester, the Fed expects inflation to fall next year. If it does not occur, the Fed is ready to use all available tools to limit price increase. Long-term inflation expectations are so far in line with projections. Mester also expects economic growth to decline in the third quarter. However, her talking points are not new for markets. For example, it was not obligatory to await the Fed's representative speech to notice a very likely slowdown in the US economy. It is enough to observe the experts' forecasts on this indicator, which will be released as early as this week. It clearly states that the GDP will fall to 2.3-2.4% q/q. Therefore, the US economy begins to slow down with the unchanged amount of QE. Besides, this perspective is not promising. If the economy is slowing, NonFarm Payrolls are down, it may require additional stimulus, not its tapering...