The Federal Reserve is playing a dangerous game in their ability to ignore and constantly undermine high sustained inflation, referring to such price behaviour as transitory. Policymakers are now navigating between their own senses of patience and risk, and a U.S. economy stymied by disrupted supply chains, slow hiring, weaker consumer demand, and poor Q3 Gross Domestic Product (GDP) readings, raising concerns over the Fed’s next move. The U.S. GDP, which measures the value of goods and services produced by the economy, grew two percent in the third quarter on an annualized basis, failing to impress market participants amid expectations set at 2.7% and previous results of 6.7% in June. The slower growth was attributed to the latest wave of covid-19 cases, sustained supply chain bottlenecks, surging inflation, and ebbing federal financial lifelines, downshifting the pace of the economic recovery from the pandemic.

Policymakers raised significant concerns around the sharp slowdown in consumer spending, which was one of the reasons behind the disappointing growth figures during this quarter. Personal consumption grew scant at 1.6% year over year in Q3, compared with a 12% growth achieved in Q2 this year. The deadly Delta variant kept consumers cautious during the course of the quarter, while supply chain constraints and shortages in raw material drove prices higher for businesses, many of which passed them on to consumers. However, it is worth mentioning that back in August, the combination of supply bottlenecks and a surge in household incomes fueled by pandemic-related government aid, pushed the personal consumption expenditure price index, a key measure of inflation, to a high 30-year high on an annualized basis.

Randal Quarles, Fed Governor, said last week that the fundamental dilemma that policymakers face is that demand, augmented by unprecedented fiscal stimulus, has been outstripping temporarily disrupted supply. Yet, the economy’s fundamental capacity remains intact and Fed officials want to keep interest rates low for as long as possible to let employment rise. The latest unemployment figures showed that in September, only 194k new jobs were created, far below the 500k market participants were expecting. However, August figures were revised up from 235k to 366k, which netted out by reducing the unemployment rate from 5.1% to 4.8%. The significant slowdown in hiring pace keeps policymakers awake at night, as withdrawing stimulus would mean that job creation will start being more challenging as conditions tighten.

The greenback remained subdued against most of its peers during the course of the month, with severe losses after Gross domestic product readings shook markets with a poor 2%. The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, fell 0.6% after the announcement and is looking to close 1.34% lower from the monthly highs, at levels last seen in October 2020. However, stocks continue to reach new all-time highs, with S&P hitting 4,569 and looking to close the month with strong momentum to break over once more. Fed officials also start to feel pressure from other central banks which have already started their tightening cycle. The Bank of Canada, announced earlier this week its decision to leave interest rates unchanged and put an end to its Quantitative Easing program, highlighting that rate hikes might come sooner than previously anticipated. On the other hand, the Bank of England is a solid candidate to be the first major Central Bank to hike rates in the post-pandemic recovery. However, friction arising from Brexitkeeps the French and British sour amid sustained threats regarding fishing rights.

The Fed will be meeting next week, and a disappointing response from policymakers could trigger a major weakness for the greenback. The Federal Open Market Committee (FOMC) is expected to announce plans to phase out its 120 billion in monthly asset purchases by the middle of 2022. Between now and next summer, the path of inflation, inflation expectations, and job growth will determine whether the central bank hastens the date of lifting its target interest rate from its current near-zero level. However, amid the recent poor growth figures, policymakers will have to make a decision to initiate the withdrawal of stimulus, without having a peek at Job reports, which are due to be released two days after and expected to create 385k new jobs. If the FOMCtakes a hawkish approach and job reports raise the alarm, unemployment will most likely linger, crippling the economic recovery. On the other hand, if the committee takes a dovish stance and job reports smash it out of the court, we might see accentuated inflationary pressures and may overheat the economy.

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