Slowing economic growth and a softer job market could allow the Federal Reserve to pivot, marking a peak for the U.S. dollar as inflation stabilizes, according to strategists at JPMorgan. “The worsening in Growth-Policy trade-off seen so far year-to-date, from both sides will be changing as we move through 2H,” said JPMorgan strategists led by Mislav Matejka in a note on Monday. “Crucially, this could open the doors to a more balanced Fed, and is driving a rollover in bond yields, potentially peaking USD and a leveling off in inflation. All four of these variables were relentlessly marching higher in the 1H, and the turn will be welcomed.”
As inflation has proved to be persistent at a four-decade high, the Fed’s aggressive tightening of monetary policy is seen threatening to tip the economy into recession. Policy makers prepared to meet this week with market participants expecting another 0.75 percentage point rate hike that would push the fed-funds rate up to 2.25%-2.5%. Read more: Four things you will want to listen for at Wednesday’s Federal Reserve meeting However, the JPMorgan strategists contend that a rollover in commodity prices will help ease some inflationary pressures as Brent crude, the global benchmark, typically has a strong correlation with headline CPI (see chart below).
SOURCE: BLOOMBERG FINANCE LP, J.P. MORGAN