FX.co ★ Mary Daly: Fed set to raise interest rate in March

As the markets await an interest rate increase from the Federal Reserve, the Fed's board members made several comments on its timetable. Last week, some Fed policymakers such as James Bullard and Raphael Bostic even stated that 4 increases could be expected. Most board members see 3 interest rate hikes in 2022, and that the regulator's policy could be adjusted at the end of the year, depending on its effectiveness. The FOMC could also agree on increasing the rate by 0.5% instead of 0.25% at one of its meetings.

Mary Daly, president of the Federal Reserve Bank of San Francisco, stated that the first interest rate increase would take place in March. She noted that inflation is "uncomfortably high" and that it is time for the regulator to wind down monetary stimulus. Furthermore, the inflationary pressure should ease when the pandemic ends, but supply and demand issues would likely not be resolved until late 2022. Fed board members assume that high inflation is primarily caused by the supply chain disruptions, and that soaring prices would slow down once supply returns to normal levels. However, this would require production to fully recover from the pandemic, and there are no guarantees that it would happen. The Omicron strain is stated to be less severe, but due to its high infectivity, it is highly unlikely the economy would avoid its impact. The governments worldwide are currently conducting a booster shot campaign, but in the future, a new strain with unknown characteristics could possibly emerge. At this point, no outlook for even 6 months ahead can be accurate, and the emergence of any new COVID-19 strain could lead to drastic changes and affect the Fed's monetary tightening plans. A significant stock market correction is still likely, but the situation could change in any direction.