The upside risk of inflation is clearly seen in last night's published minutes. FOMC members are seeking another 50-bps rate hike in the next meeting, and strong economic and Job data give the Fed more headroom to keep raising interest rates. These conditions make a stronger USD and continuing pressure on stock markets more likely.
On Wednesday evening, the Open Market Committee of the US Federal Reserve published the minutes of its February monetary policy meeting as scheduled. According to the minutes, most participants unanimously agree on the upside risk of inflation, which is mainly due to the Russia-Ukraine war and China reopening. On the other hand, as data show, and the policymakers also agree, the Job market is going well, and it can help the inflation upside risks to stay higher for longer.
These data encourage them to support maintaining a restrictive monetary policy until we have definite indications that inflation is falling back. Therefore, another 50-bps rate hike is so likely to be decided in the next meeting, and if so, there will be a higher chance of a US recession this year. However, to avoid these fears, markets still widely expect the central bank to raise interest rates by only 25 basis points next month. Economic data, including CPI, PPI, retail sales, Factory orders, and Labor market conditions, will be essential to follow before the next meeting because, as Fed chair Powell said, decisions will depend on data.
For now, and based on data and FOMC members' comments, we expect the Fed to continue to raise interest rates, which will negatively impact the stock market. The S&P 500 Index trades around 4,000 key and psychological levels under its first critical resistance at 4,200. After publishing the minutes, USD Index, which already had a bullish shape, continued its uptrend, and now it is in a clear uptrend. However, 105 is the key pivot, and if DXY can hold above this level, it can continue further.