US Dollar Supported as Fed Officials Call for More Rate Hikes to Fight Inflation

The U.S. Dollar is trading flat early Wednesday after posting a choppy, two-sided trade the previous session despite hawkish commentary from several Federal Reserve policymakers.

The greenback is edging lower against the Euro and Japanese Yen, but is slightly higher against the British Pound. The subdued price action is the result of traders monitoring central bank activity and the impact on the growth of the global economy from their aggressive efforts to drive down inflation.

At 23:52 GMT, December U.S. Dollar Index futures are trading 114.095, unchanged. On Tuesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $30.68, up $0.02 or +0.05%.

Dollar Supported by Hawkish Fed Members

With the dollar index hovering just below a two-year high at 114.445, the trading activity suggests higher prices could continue especially with Federal Reserve officials ignoring the pain in the stock market while calling for the need of further rate hikes.

Minneapolis Federal Reserve Bank President Neel Kashkari was the latest hawk to voice his opinion when he said on a WSJ Live interview Tuesday that the Fed needs to keep tightening until it has evidence underlying inflation is heading down, then should pause and “let the tightening work its way through the economy” to see if it has done enough.

Early Monday, Susan Collins, the new president of the Federal Reserve Bank of Boston, endorsed Fed projections released last week that signaled its benchmark interest rate would rise to 4.6% by next year, up sharply from about 3.1% now.

Later, Cleveland Fed President Fed President Loretta Mester said, “When there’s a lot of uncertainty, it can be better for policymakers to actually act more aggressively, because aggressive action and pre-emptive action can prevent the worst-case outcomes from happening.”

Avoiding Recession Will Be a Challenge

The comments from the three Fed policymakers contributed to the ongoing debate about how badly the Fed’s rate hikes – the fastest in more than 40 years – will hurt the economy. By increasing its benchmark rate, the Fed is making mortgages, auto loans and credit cards more expensive for consumers and businesses.

Boston Fed President Collins acknowledges the rising worries about a recession, but she believes, “the goal of a more modest slowdown, while challenging, is achievable.”

Other Fed officials hope their rate hikes will achieve a “soft-landing” by slowing consumer and business spending enough to bring down inflation but not so much as to cause a recession. However, many economists are increasingly skeptical that such an outcome is likely. They think the U.S. could face a recession next year.

Fed Chairman Jerome Powell even acknowledged that “the chances of a soft landing are likely to diminish” as the Fed steadily raises borrowing costs.

“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Powell said.

Short-Term Outlook

There needs to be a slowdown in the economy to get inflation under control and the Fed sees rate hikes as the means to achieve this. This will be supportive for the U.S. Dollar until the Fed slows the size and the pace of the rate hikes, allowing other policymakers like the European Central Bank to catch up.

Even a U.S. recession is not likely to be enough to weaken the dollar because other economies are already headed there like the Euro Zone. Furthermore, a global recession will likely enhance the greenback’s appeal as a safe-haven asset.