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During his confirmation hearing on Tuesday, the Fed chairman Jerome Powell did not give any comments regarding the timing of the first interest rate increase or the balance sheet reduction, saying the regulator has not made any decisions yet. Powell's statements disappointed the market, which has already priced in the Fed's monetary tightening and expected to hear more concrete information about future Fed measures. As a result, the US dollar slid down.
The Fed chair hoped the current wave of the pandemic would not have a long-lasting effect on the US economy and would not jeopardize monetary tightening plans. Powell also noted the Fed's current objective - tackling high inflation, which remains well above the target level of 2% and has reached the highest level in 40 years. Price stabilization would be essential for supporting the economy and raising employment levels.
"Inflation is running very far above target. The economy no longer needs or wants the very accommodative policies we have had in place," Powell said. He emphasized that it would take a long time to normalize Fed policy.
Rising prices were the main topic at Powell's confirmation hearing. The Fed chairman stated the Federal Reserve would have to act to tackle high inflation. He also reiterated that once global supply chains start to catch up with demand, it would reduce inflationary pressure.
With economic adjustments likely to take a long time, the US central bank, which earlier called inflation "transitory", decided to spring into action, determined to reverse soaring prices by mid-2022. "We will use our tools to get inflation back," Powell said.
Regarding the timing of the first interest rate hike, the Fed chairman commented that the regulator would have to "be humble but a bit nimble". No decision have been made yet, but the balance sheet reduction could possibly be enacted earlier and faster than after the recession of 2007-2009.
The positions of Federal Reserve's chair and vice chair require confirmation by the US Senate, which is currently under Democrat control. Jerome Powell is expected to be confirmed for his second 4-year term in office.
Powell was also criticized by some US senators, who view his policies as too lax. Republican senator Pat Toomie said he was concerned that the Fed's response to the pandemic may now be stoking inflation and "could become the new normal."
Democrat senator Elizabeth Warren, who opposes Powell's reappointment, stated the Fed was too late to react to rising prices.
Powell gave no hints regarding the timing of the first interest rate hike. Market players would look for any signals given by other Fed officials in the future. The US Fed funds futures market have priced in 4 increases in 2022.
Today's US CPI data release would also serve as a challenge to USD.
USDX is currently under pressure below 96.00. If the index breaks below 95.70, the US dollar could slump further. However, it is currently trading near 95.00 and still has upside potential.
Other currencies rose against the dollar during its slump. The euro is approaching 1.1400 - if EUR/USD breaks through this key level, its downward outlook would have to be revised.
GBP/USD jumped above the psychological level of 1.3600. The pair is below the 200-day MA line, but its neutral trend is now leaning bullish. 1.3700 could be the next target for bulls, however GBP/USD would have to overcome resistance at 1.3644 and 1.3699 to reach it.
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