The DXY surpassed 104.85 yesterday as it advanced on highs not seen since 2002 as investors weighed on a further tightening of monetary policy after Wednesday’s inflation print surpassed market expectations by 0.2 percentage points as it hit 8.3%. While this was a lower rate than the previous month’s print of 8.5%, forecasters predict that even if inflation has hit its peak, it is unlikely that it will ease off rapidly as it rose. As such the general market consensus is that the FOMC will make two further 50bpt rate hikes during their June and July meeting, and that the base interest rate will edge around 3.25% by the end of the year.Sticking with the FOMC, the US Senate have confirmed the Federal Reserve Chair Jerome Powell for a second term by 80 votes to 19 extending his tenure for another four years. When Powell assumed his position in 2018, he planned to reduce the Fed’s balance sheet from $4.5 trillion to a range of $2.5–3 trillion over his first four-year term. By early 2019, this plan had been discarded as asset classes struggled over 2018 and by the end of the year the Pandemic saw an unprecedented level of monetary stimuli being pumped into the US economy with the balance sheet rising to close to $9tn. The Fed now plans to start the mammoth task of unwinding their balance sheet, by reducing their holdings of government treasuries and mortgage-backed securities by $47.5bn per month from June, which they intend to ramp up to $95bn per month over subsequent months. Hence, Powell’s first term has undoubtably been characterised by the Pandemic and inflation hitting four-decade highs, while his initial policy of reducing the balance sheet was utterly upended. The question remains then, what will the next four years have in store?
There are reports that Boris Johnson will ask Cabinet to cut 90,000 jobs in order to make cash available to help alleviate the cost-of-living crisis. Sources indicate that the plan could look to make £3.6bn available, however there will be numerous hurdles to jump before plans come into being – if they ever do. The number of civil servants rose sharply following the Brexit referendum, moving from 384,000 in 2016 to 475,000 by December 2021 as the pandemic required further staff. That said, the number of civil servants in 2016 was the lowest since the second world war and the general pattern before Brexit and the Pandemic was one of decline. Indeed, in October last year Rishi Sunak unveiled plans to “reduce non-frontline civil service headcount to 2019-20 levels by 2024-25” as part of his 2021-24 spending review. According to the institute for government just under 70% of civil servants work in the five largest departments, that being: the Department for Work and Pensions, the Ministry of Justice, HM Revenue and Customs, the Ministry of Defence and the Home Office.
While Johnson may want to give the impression that £3.6bn could be made available to tackle the cost-of-living crisis, it is likely that funds will need to be made available to cover the cost of increasing Britain’s weapons stockpile to “at least at the scale of the Cold War arsenals” (a statement that was made yesterday in a 1922 Committee report). The Committee also said that plans to reduce troop numbers by 10,000 to 72,500 by 2025 must be “halted immediately” given the precarious geo-political climate. Despite pressure from back-benchers, Rishi Sunak rejected calls to increase the UK’s defence spending during his latest spring statement.
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