Powell Says Inflation Will Decline In 2023, U.S. Dollar Tests Session Lows

Key Insights

• Powell noted that disinflationary process had begun. 
• Fed will not change its inflation target. 
• The decision on any potential rate cuts in 2023 will depend on economic data. 

Powell Says Fed Sticks To The 2% Inflation Target

On February 7, traders focused on Fed Chair Powell’s comments on the monetary policy at The Economic Club of Washington.

Powell noted that the disinflationary process had begun, but there was a long way to go before Fed’s inflation target would be reached. Importantly, Powell stated that Fed would not change its 2% inflation target, which remained the global standard.

According to Powell, the road to the 2% inflation will be bumpy. The recent job market data was much stronger than expected, and the Fed must continue to raise rates to reach a sufficiently restrictive level. Powell also noted that he expected significant progress in the fight against inflation.

Speaking about the potential for a rate cut in 2023, Powell said that Fed’s decisions would depend on economic data. The Fed continues to reduce the size of the balance sheet and has no target for this reduction. As in the case of interest rates, the decision to stop the reduction of the size of Fed’s balance sheet would be data-dependent.

U.S. Dollar Retreats After Powell’s Comments

U.S. Dollar Index tested session lows after Powell’s comments. Traders bet that inflation will decline significantly in 2023, so the Fed will have an opportunity to cut rates. Powell said that such a decision would be data-dependent, so he did not rule out a rate cut in 2023.

Gold remained stuck near the $1875 level despite weaker dollar and lower Treasury yields. It looks that Powell was not dovish enough for gold traders.

S&P 500 tested session highs as traders bet on a less hawkish Fed. Currently, S&P 500 is trying to settle above the 4150 level.

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