The shock revelations from the release of the Fed minutes continued to dominate markets overnight. The Fed minutes revealed the Fed has finally realised the extent of the problem they are facing, with runaway inflation. The minutes indicated that they will finally put a realistic plan in place to attack the crises facing the country. They will begin by removing the massive QE and contracting the massively bloated balance sheet (QT), by USD$95 Billion/month and considering 50 basis point interest rate rises. This would go a long way to addressing the problem, although it will take time to play out and probably drive the US economy into recession. The question now is, whether the Fed board has the constitution to hold the line with this painful economic solution?
The prospect of rising interest rates and less liquidity finally impacted the bond markets, with US treasuries rising sharply, initially supporting the US Dollar. The EUR continued to decline, falling to 1.0870, while the GBP dropped as low as 1.3050. The dire economic straights the European’s find themselves in, is only exasperated by the Russian sanctions, currently blowing up in their collective faces.
The rising reserve and softer commodity prices have taken a toll on the AUD, which fell back to 0.7470, while the NZD dropped below 0.6900. Chinese COVID lock-downs will damage the Chinese economy and this is yet to play out in data and markets, or flow through into the heavily dependent economies.