FX.co ★ Which side will Jerome Powell take?

The key event of this week will take place today. In the evening, the Fed is expected to announce the results of the meeting. Traders are already quite accustomed to not waiting for any changes in monetary policy, so they will focus on the speech of Jerome Powell. However, what Powell will tell us can only be the small perceptible part of a much larger situation. It can be recalled that inflation in the United States has already jumped to 5.4% YoY, which has not been in the States for 13 years. If inflation rises a little more, a 25-year record will be set. In this regard, many members of the Fed board believe that the quantitative stimulus program needs to be urgently curtailed. Maybe not right now, but at least this issue requires immediate discussion and the conclusion of a specific date when it should be completed. Most experts believe that the most appropriate date is January 2022. This date is also adhered to by the "doves" in the monetary committee, and, most likely, Jerome Powell himself. Previously, Powell has repeatedly stated that the main target for the central bank now is a complete recovery of the labor market, and not inflation. Inflation was the target as long as it was consistently below 2%. Now, this is already a problem. However, the labor market is still far from its pre-crisis values, so the economy still needs to be stimulated.

Based on this statement, we have already made calculations that if the NonFarm Payrolls indicator adds 0.5 million new jobs outside the agricultural sector every month (a very real figure), then we can talk about a full recovery of the labor market in 12-15 months. Accordingly, after 7-8 months, it will be possible to gradually wind down the QE program. We believe that there will be no tightening of monetary policy earlier than this time. However, there is also a second wing in the Fed, which believes that a further increase in inflation will lead to much more serious problems than an under-restored labor market. The "hawk side" of the Fed believes that inflation will not decrease as quickly as it has grown, based on the termination of the influence of temporary factors. In their opinion, this year and next, inflation will significantly exceed 2%, so now it is necessary to take measures to contain it. Thus, despite the fact that Jerome Powell himself has repeatedly stated that economic stimulation will continue (in particular, he said this in the US Congress a couple of weeks ago), there will be tough battles between "hawks" and "doves" at the Fed. Therefore, there is also a certain probability of a surprise. In any case, the attention of traders will be directed exclusively to the QE program and everything related to it. It can be recalled that if Jerome Powell hints at its imminent collapse, this may support the US currency, but create pressure for the stock market, which has been growing recently solely on monetary injections from the Fed.