The
dollar rally will be mitigated in the coming months because the
Fed's extraordinary monetary policy won't result in sustained
inflation, they told the Reuters Global Markets Forum.
Fed officials have said the central bank will ignore the price
pressures expected to accumulate in coming months and let the
economy run "hot" to encourage more hiring.
"The most likely outcome is that after a spring peak (of) around
3.5% for headline CPI and 2.5% for core PCE, inflation will fall
back, while remaining above 2% for longer than at any other time
over the past decade," said Gregory Daco, chief U.S. economist
at Oxford Economics.
Graphic: Fed sees strong economy, low rates Fed sees strong
economy, low rates -
https://graphics.reuters.com/USA-FED/PROJECTIONS/
gjnpwoaxxpw/chart.png
The risk of inflation spiralling out of control was limited
because rising prices would in turn restrain demand, and the Fed
can eventually rely on its toolkit, including forward guidance
and yield-curve control, to control runaway prices.
"The inflation we are seeing is not wage/price spiral stagnation
inflation, it is recovery inflation and transitory," said
Jeffrey Halley, senior market analyst for Asia Pacific at OANDA.
Halley expected the dollar to end the year lower, with the
Japanese yen topping out at 112.00 to the dollar. It is
currently at 108.99.
There is a real possibility that bond yields will keep rising,
but the Fed doesn't have to raise interest rates to combat it,
said Kristina Hooper, chief global market strategist at Invesco.
"Operation Twist is most likely," Hooper said, adding that she
expected the Fed to act only if markets became "disorderly" when
the 10-year yield reaches 2%.
The benchmark U.S. 10-year yield is currently at 1.6191%.
US10YT=RR
"But if the 10-year yield rises to even 3% and markets are able
to digest the rise in yields, then the Fed will not step in,"
she said.
Eric Freedman, CIO at U.S. Bank Wealth Management, likened the
communication between the markets and the Fed to "the game of
Marco Polo," where markets sell bonds and wait to see if the Fed
is worried about that interest rate level.
Freedman said rates would have to move higher and more abruptly
for the Fed to get concerned.
(These interviews were conducted in the Reuters Global Markets
Forum, a chat room hosted on the Refinitiv Messenger platform.
Sign up here to join GMF: https://refini.tv/33uoFoQ)
(Reporting by Divya Chowdhury in Mumbai and Lisa Pauline
Mattackal in Bengaluru; editing by Larry King)
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