Two of the most hawkish Fed policymakers supported increasing interest rates by another 75 basis points in July to quell soaring inflation. They also downplayed concerns that the US economy was moving towards recession.
Governor Christopher Waller and James Bullard, the president of the Fed Reserve Bank of St. Louis, both stressed the importance of pursuing a hawkish policy course to fight the hottest price pressure in 40 years, even if it meant an economic slowdown. Waller and Bullard are both voting board members of the FOMC this year.
"We need to move to a much more restrictive setting in terms of interest rates and policy, and we need to do that as quickly as possible," Waller stated at a webcast on Thursday. "So I am definitely in support of doing another 75 basis point hike in July, probably 50 in September. And then after that we can debate about whether to go back down to 25s, or if inflation doesn't seem to be coming down we have to do more."
Waller and Bullard belong to the hawkish wing of the Fed. Their case for the accelerated rate hike has found broad support lately. According to FOMC's June meeting minutes, the US central bank was ready to tighten monetary policy even further than anticipated in their latest outlooks, if necessary. According to the latest forecasts, the Fed is now expected to increase the key interest rate to 3.4% by December 2022. The rate is expected to peak in the 3.75-4% range in 2023. The current interest rate range is 1.5-1.75%.
While Fed policymakers acknowledged that a more hawkish policy could weigh down on the economy, they stated that returning inflation to its target level of 2% was a more important goal. According to the latest outlook, the US CPI is expected to rise by 8.8% in June 2022. The inflation data will be released by the US Department of Labor on July 13.
During a separate event held on Thursday, James Bullard made similar arguments in favor of an interest rate hike. He said the US economy still had a good chance of a soft landing, despite the ever-present risks. "When I see all these recession prediction models out there, I have to smile a little bit because we know it's not really that easy to predict a recession," Bullard told reporters. He added that another 75 bps move was the best course of action at that point. "I've advocated and continue to advocate getting to 3.5% this year, then we can see where we are and see how inflation's developing at that point."
Bullard acknowledged that this monetary policy would likely slow down the economy, but said it should not strongly impact the labor market. Although economists estimate that nonfarm payrolls for June rose by about 270,000, one of the slowest months for job creation since the pandemic began, it is not a matter of concern, as it still greatly exceeds average job growth before the COVID-19 pandemic.
The outlook for EUR/USD remains abysmal. Bullish traders are unlikely to quickly regain the initiative and start a rally. The pair needs to regain 1.0215 to halt the downtrend. From there, it could move towards 1.0270 and 1.0340. However, even such a recovery would not allow bulls to take control of the market - the pair would likely be stuck in a sideways trend once again. If the euro slides down below 1.0120, it could then sink towards support at 1.0070. A breakout below this level would allow EUR/USD to test 1.0030.
The pound sterling has bounced up slightly after hitting new lows. However, GBP/USD would need to settle above 1.2050 to start a major upward correction. From there, the pair could surge to 1.2090 and 1.2120, where bulls would face a serious obstacle. If GBP/USD surges downwards, it could test 1.2160. A breakout below the 1.1980-1.1950 range would send the pair towards the low at 1.1910, opening the way towards 1.1870.