Will the Fed tighten its monetary policy?

Will the Fed tighten its monetary policy?

The U.S bond yields experienced notable declines after the Fed's dovish statement. Inflation expectations could force the Fed to tighten monetary policies.

The stock indices received significant support after several dovish speeches coming from the leading central banks, the FED, the European Central Bank, and the Bank of England. This support started due to interest rate hikes not coming up anytime soon, at least for the short term.

But uncertainty is still present among investors across the world.

The global economy could face slowdowns due to production disruptions and the massive increase in energy and maritime transport prices. Central banks considered postponing the normalization process of monetary policies, as increasing interest rates could aggravate the situation.

On the other hand, especially in the case of the FED, the inflation data worries more, with levels that are double the acceptable threshold of price growth.

The inflation expectations – closely followed and released yesterday – continue to rise. Between today and tomorrow, data for the industrial production price index and the consumer price index will be published, with the markets expecting to see increases.

In this scenario, where prices continue to rise, the FED will be forced to tighten policies, especially if the labour market shows signs of tension. The pressure comes from falling unemployment rates and high wage costs, as stated yesterday by several Federal Reserve officials who favoured interest rate hikes for 2022.

The U.S bond yields experienced notable declines after the Fed's dovish speech but ruled out any possibility of rate hikes soon, making the dollar weaken slightly for the last two days.

From a technical analysis perspective, the stock indices are beginning to show signs of exhaustion, with the Nasdaq index reaching record highs and with a weekly RSI pointing to a potential bearish divergence. These factors could increase the selling appetite of investors, leading to some long-awaited corrections.

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Source: Bloomberg, Reuters

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