The U.S. Federal Reserve Bank will be withdrawing its record monetary stimulus package by the end of June. This fuels expectations that that inflation is on the rise and there is opportunity for an interest rate hike.
Economic data have so far shown that inflation in the US has began to rise since the Fed began its second round of asset purchases last November.
“It’s highly likely that some movement in inflation expectations will be the first signal that they need to take action”, said J. Alfred Broaddus, former president of the Federal Reserve Bank of Richmond. “The Fed is right to be watching this very, very closely”, he added.
Since the Fed began its asset purchase program, $2.3 trillion worth of assets were bought to jump start the struggling US economy out of recession. Unemployment is still at 9 percent but some policy makers including Philly Fed’s Charles Plosser believe that it would be too risky to wait too long to raise rates due to the danger of inflation getting out of control.
The right timing is necessary to tighten monetary policy.
Meanwhile, Fed Chairman said after a meeting with the FOMC that “If inflation persists or inflation expectations begin to move, then there’s no substitute for action”.
All eyes will be on the Fed’s next move and which direction they will take. The US Dollar has been gaining strength in the past two trading days, as investors are confident that the US economy will outperform a debt ridden Europe. With increasing expectations of a rate hike by the Fed could boost the greenback even more.
Since May4, the Dollar has gained 975 pips against the Euro, when the EURUSD since dropped from 1.4939 down to 1.3968 in the US session on today