Dollar at 3-month low after Fed official signals rate fall

Investors are increasingly confident that US Federal Reserve will begin cutting interest rates in mid-2024. The dollar has hit a low of three months on Tuesday.

US currency fell 0.5 percent against a basket containing six currencies to reach its lowest trading level since mid August.

The decline was accelerated when Christopher Waller, a hawkish Fed policymaker, said that rates would not rise any further, and they could even be reduced if inflation continued its slowdown.

Waller , a senior economist at the American Enterprise Institute , told the think tank that he was “increasingly confident” about the current policy’s ability to slow down the economy and bring inflation back to the Fed’s 2 percent target.

“If we continue to see disinflation for several months, I don’t even know how many months that could be. Three months, four months or five months? . . You could start to lower the policy rate because inflation is lower.”

He said: “There is no reason for you to keep [rates] high, and inflation has returned to target.”

Last month, inflation was lower than expected at 3.2%. This is compared to a high of 9.1% in June.

Fed Chair Jay Powell stated this month, that the central banks was not considering rate cuts “now or ever”.

Investors now believe that the Fed will likely cut interest rates in May, a month sooner than implied by pricing last week.

The yield on US government bonds, which moves in the opposite direction to price, dropped 0.04 percentage points to 4.35 percent on Tuesday. The yields have fallen to levels last seen in September, before the Fed meeting. was triggered by warnings about interest rates remaining higher for longer.

The yield on the two-year bond, which is sensitive to expectations of interest rates, has fallen as low as 4,75 percent, its lowest level in August 10.

Dollar is on track for its worst month in a decade, after losing 3.6 percent since November began.

Waller’s comments also come in the final days before public communications from the Fed The number of seats at the last policy meeting for the year is limited.
The central bank, after 11 consecutive increases in interest rates following March 2022 has maintained its benchmark rate at a 22 year high of 5,25 to 5.5 percent since July.

Waller stated that the Fed was widely expected to hold rates during its December meeting. Waller also said US growth appears to be slowing “as I hoped, supporting continued progress in inflation”. Recent data showed that consumption is declining along with business activity and labor demands.

Waller, in a question and answer session, said that he expects growth to slow down significantly from the 4,9% annualized rate recorded between June-September to 1 to 2%.

He said it was too early to declare definitively that Fed has ended rate-rising cycle as the labour market remains “fairly tight”, with job creation exceeding supply.

He mentioned that the looser financial conditions, partly influenced by bond market movements, also suggested the need for caution.Lower yields may offset some of the effects of Fed rate increases.

Michelle Bowman, , his colleague Fed governor, said on Tuesday that she believed the central bank still needed to raise rates to bring down inflation in a timely manner.

She warned that factors such as consumer spending strength and supply-side effects could cause inflation to be higher than expected. She also suggested that the “neutral interest rate,” the level of interest that does not stimulate or depress the economy, may have increased in response to the Covid-19 epidemic.

Bowman stated that “we should be mindful of the risks and historical lessons associated with prematurely declaring a victory in the battle against inflation. This includes the risk that the inflation could settle at a higher level than our 2% target without any further tightening in policy.”