The U.S. Dollar staged an extremely strong rally against other major currencies Tuesday after comments from Fed Chair Jerome Powell in which he said it’s time to retire the word transitory and indicated the central bank could speed up the pace of cutting its monthly bond buying.
Speaking to the Senate Banking Committee, Powell said, “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, perhaps a few months sooner.”
At the Fed’s November meeting, it said it would reduce bond purchases by $15 billion a month.
Furthermore, Powell said the risk of persistently higher inflation has increased, and he expects high inflation through next year, although the baseline expectation is that it will move back down over the course of 2022.
Reacting to Powell’s comments, U.S. dollar-related assets moved in the greenback’s favor. The EUR/USD fell over 100 pips, likewise the GBP/USD and other dollar pairs, while XAU/USD dropped around $38.
A notable remark from the Fed chair was on the use of the word “transitory,” relating to the current stance of Fed officials on inflation. However, Powell said it is probably not beneficial anymore.
Powell stated, “the word transitory has different meanings for different people,” adding that they “tend to use it to mean it won’t leave a permanent mark in the form of higher inflation.”
Nevertheless, he thinks it’s “probably a good time to retire that word and try to explain more clearly what we mean.”
Powell is not diverging from the current stance that inflation is temporary, but that the word itself needs to be retired, and the Fed needs to explain more clearly what it means.