FX.co ★ Fed's "helicopter money" led to inflation growth

Following Tuesday's decline in the market, there is an increase on Wednesday that is more like a common pullback amid high volatility than a true local reversal.

The situation in the markets seems to be getting more and more confusing. The main reasons for this are the news from the US. First, Fed Chairman J. Powell made a speech yesterday at a Senate hearing, in which he reported that the current inflationary pressure is disappointing and that it will fall next year. It can be recalled he claimed earlier that the inflation growth will be temporary and that it may begin to decline by the end of this year. But so far, there is only some deceleration. Powell's words indicate that its high values may linger as early as next 2022, which will become a mandatory reason to start the process of raising interest rates. These prospects will change the situation on the markets beyond recognition and will be a broad basis for the fundamental strengthening of the US dollar.

What motivated Powell to increase inflation?

He explained this by the fact that the supply of goods does not keep up with high demand. This is indeed true, but he did not discuss an important topic, which is taboo in American politics. These are massive measures of social support that were taken in America after Biden came to power. They are often called "helicopter money", which is inherently inflationary since they are not provided with anything. In fact, we can say that the authorities, seeking the victory of the 46th President of the United States, promised unprecedented measures of financial support to the population amid the COVID-19 pandemic. In turn, the lower strata of society with low incomes simply do not want to go to work, which is clearly indicated by the labor market data. Therefore it turns out that the balance between supply and demand is disrupted, which leads to an increase in inflation.

It has already been repeatedly pointed out that this is the basic reason. But while the American authorities, due to political considerations, are not going to eradicate it, the problem of inflation will continue over the States. That's why as soon as the process of raising interest rates begins, and the Fed will have to do it, the American population will begin to rapidly become impoverished amid the dollar's appreciation.

In this situation, we can witness the final downward reversal of local stock indices and the beginning of a new wave of recession in the country with all the negative consequences.

Forecast of the day:

The EUR/USD pair remains under pressure. The pair reached the first target of 1.1600 and is expected to further decline to the level of 1.1550.

The USD/JPY pair has continued to rise and is trading above the level of 111.70. Its consolidation above the level of 112.00 will lead to its growth to 112.40, and then to 113.00.