FX.co ★ New speeches by Loretta Mester and John Williams from the Fed

There have already been quite a few speeches by representatives of the Fed's monetary committee this week. Naturally, it was always about inflation and monetary policy, which is always interesting for both the currency and stock markets. Yesterday, the head of the Federal Reserve Bank of Cleveland, Loretta Mester, said that the Fed's actions should not lead to a serious decline in the economy. In her opinion, the situation with inflation remains serious, and an increase in the rate will lead to some slowdown in economic growth. However, in the medium term, the US economy should not enter a recession or shrink significantly due to the actions of the regulator. She also noted that unemployment may rise in the next few quarters, and the markets may see another negative value of GDP, as it already was in the first quarter. Recall that according to the results of the first quarter, the American economy shrank by 1.4%. Mester said that one of the important problems is balancing demand and limited supply. In her opinion, inflation is also rising due to the limited supply of many goods, while demand remains high due to the serious inflation of the money supply and cheap loans. The coronavirus pandemic also played a role, when demand among the American population was very low. As a result, Americans accumulated serious amounts of money during the pandemic, which they rushed to spend as soon as the situation with the pandemic got better. Separately, Mester noted that Ukraine and China are now the main sources of inflationary risks. Recall that military operations are continuing in Ukraine on a fairly large territory, which threatens the sowing company and practically blocked the export of food to the EU and Africa. China has recently introduced several "lockdowns" due to new COVID outbreaks, which has led to a new disruption of supply chains.

The head of the Federal Reserve Bank of New York, John Williams, also spoke. He said that two increases in the key rate at the next two meetings by 0.5% is a "starting point". According to Williams, in general, the rate should be in the range of 0.0-0.5% with inflation of 2.0-2.5%. Thus, after-inflation returns to the target level, which may not happen for a very long time, the Fed may begin a cycle of lowering the key rate. Williams assured that the Fed is ready to raise the rate as long as it takes to return inflation to 2%. He also noted problems with supply chains and high demand. In general, in the next few months, we will be watching from the front row for strong changes in US monetary policy, the economy, and the markets. Markets were happy to grow during the two years of the pandemic when the Fed poured trillions of dollars into the economy, but now they will fall no less strongly to return to pre-pandemic levels.