While market players await the crucial inflation data from last year, which could trigger another rally, three leading Chicago Fed economists said the Fed will raise rates by one more percentage point before announcing that it has reached the ceiling so it will end the monetary policy tightening.
Economists predict that rates will peak around 5.5% and stay there for a long time, keeping prices of everything from food to fuel in check. "I do think the Fed is going to keep rates at the highs for a while," said Randall Kroszner, a former Fed governor. "Even if inflation falls by 200 basis points over the year, or maybe even 300 basis points, the Fed will still keep rates at 5.5%," he added.
Inflation jumped to a 40-year high last year as global demand for goods and services recovered. Although prices have fallen since then, they are still well above the Fed's 2% target, making the bank realize that they missed the appropriate time they should have started to raise rates. Of course, if no more problems arise in the market and if the situation remains stable, economic recession will still be avoided.
Fed officials increased interest rates to 4.3% last month and forecasted that it will reach 5.1% this year. This is entirely different from the path they took back in the 1970s, when inflation began to slow. It was probably because the decision before was a fatal mistake as prices began to rise sharply again, leading to a crisis in the economy.
Although today's data may indicate that inflation remains under control, the Fed will most likely be more deliberate in its decisions. At least, that is what many market participants are hoping for. But many experts say there is a vast difference between the late 1970s, early 1980s and today as it is obvious that the Fed has not lost confidence in the markets. If events unfold in this way, a rate hike will probably lead to a mild recession later this year, but it will only be short-lived.
In terms of the forex market, there are still chances of hitting new monthly highs in EUR/USD as long as buyers manage to push euro to 1.0760. That will spur the pair to rise above 1.0790 and reach 1.0850. But if pressure returns and sellers get ahold of 1.0760, euro will collapse to 1.0720 and head to 1.0680 or as low as 1.0650.
In GBP/USD, the rally is gradually slowing down, which means that buyers need to stay above 1.2120 in order to maintain their advantage. Only the breakdown of 1.2180 will push pound to 1.2240 and 1.2300 as a return of pressure around 1.2120 is likely to result in a collapse to 1.2060 and 1.2010.