Feds Collins:It’s possible the Fed will need to hike rates to cool inflation pressures
The desk interprets recent comments from Fed Governor Susan Collins as indicative of a more hawkish stance regarding interest rates, emphasizing the need for sustained restrictive policy to combat persistent inflation pressures. Per the full note source, Collins highlighted that the Fed may need to hike rates further to achieve its 2% inflation target, particularly in light of ongoing geopolitical tensions that could exacerbate inflation. This aligns with our view that the Fed is unlikely to pivot towards rate cuts in the near term, despite hopes for easing later this year. The broader market consensus appears to be split, with some firms anticipating a more dovish approach as inflationary pressures potentially cool in the coming months.
What the desk is arguing
The desk frames this as a clear signal that the Federal Reserve is prepared to maintain or even increase interest rates to manage inflation risks. Collins' remarks suggest that the Fed's current policy is not only well-positioned but may need to remain restrictive for an extended period due to persistent inflation concerns.
Supporting this view, Collins expressed worry that inflation might not significantly decrease until 2027, indicating a long road ahead for monetary policy normalization. The potential for renewed rate hikes, especially in the context of a prolonged Middle East conflict, underscores the Fed's cautious approach to easing policy too quickly.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which shares a similar hawkish outlook, while bofa presents a more cautious stance at the lower end of the spectrum. The desk's call is positioned at the upper bound of the consensus range, reflecting a more aggressive stance on potential rate hikes.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's perspective, emphasizing the need for continued vigilance against inflation. Conversely, bofa and goldman sachs are more skeptical, suggesting that inflation may cool sooner than anticipated, allowing for potential rate cuts.
Watch the USD/EUR trajectory closely, as it is likely to mirror the Fed's rate path. Additionally, the performance of the DXY index will be crucial in assessing market sentiment regarding the Fed's monetary policy direction.
What the calendar says
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Right now Fed policy well positioned to deal with risks Expects Fed will need to keep restrictive policy for some time It’s possible US central bank will need to hike interest rates to cool inflation pressures Essential for Fed to do what’s needed to get inflation to 2% Hopes economy will allow for more rate cuts later this year Prolonged Middle East war creates challenging policy choices Quick end to war would mean resilient demand, some rise in unemployment Inflation persistence makes it harder to look through energy shock Energy shock creates downside growth risks, upside inflation risk It is critical that inflation expectations stay anchored Inflation will not abate this year, could cool in 2027 Most worried about inflation outlook right now The longer the war goes on, the greater the inflation impact US is more insulated against energy shocks than in the past Collins is not a voting member on the FOMC board this year. Collins’ comments lean more hawkish overall. While she still expressed hope for additional rate cuts later this year, the broader message focused on persistent inflation risks, the possibility of renewed rate hikes, and the need to keep policy restrictive for an extended period.
Her concern that inflation may not cool meaningfully until 2027, combined with warnings that a prolonged Middle East conflict could worsen inflation pressures while slowing growth, suggests the Fed remains highly cautious about easing policy too quickly. This article was written by Greg Michalowski at investinglive.com.
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