The Fed forecasts at least two rate hikes this year.
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Complacent investors and markets received a sharp reminder this week that yes, the US central bank would like to nudge borrowing costs higher, possibly as soon as next month. The tortured dance between the Federal Reserve and markets has been suspended lately, helping many sectors – notably commodities, junk bonds and emerging markets – repair a damaging start to the year.Focusing on a data-dependent Fed, however, misses the important aspect that central bank policy also treads a fine line with asset prices.Before the latest missive from the Fed, the dollar was already showing signs of renewed activity and rattling other markets.A stronger dollar translates into weaker commodity prices, spurring global disinflationary worries, while closer to home, US equities are also hurt by currency strength thanks to weaker foreign revenues.Investor aversion in the coming weeks means the Fed will once again recognise how a strong dollar is problematic for global markets and thus keep policy sidelined.
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