Taming the Dollar: Assessing Powell's Hawkish Tone Amidst BRICS Expansion

Yes, Mr. Powell? 

Those who expected the US dollar to tumble because BRICS are enlarging their alliance with top oil producers were disappointed yesterday. The US dollar extended gains to the strongest levels since the beginning of summer, as traders positioned for a hawkish speech from the Federal Reserve despite two Fed members hinting that the end of the Fed tightening is certainly near.  

Boston Fed's Susan Collins said yesterday that we may be 'near a place where we can hold rates for a substantial amount of time', and Philadelphia Fed President Patrick Harker said that the Fed has 'probably done enough' and should keep the rates at restrictive levels and watch the impact on the economy.  

Looking at the projections, the Fed's median rate showed in June that the Fed could increase rate one more time and stop, but pricing in the market suggests that the Fed may already be done with its rate hikes.  

Bond investors are particularly focused on whether the Fed is willing to revise the neutral rate, r* - a rate at which the economy neither slows nor speeds up, higher. Any hint of a potential upside revision to the neutral rate could trigger a further bond sell-off.  

Note that Jerome Powell has made it clear that the Fed itself doesn't know where this hypothetical r* stands. 

But one thing looks increasingly plausible to everyone and that's what Bullard said: 'the probabilities are that we are in a new regime that will be a higher interest-rate regime', therefore a higher neutral-rate regime.  

And that's best for President Biden, as inflation is one of the most effective ways to... deflate debt.