Amid the persistent acceleration of inflationary pressure and the fact that the US is on the cusp of full employment, it is expected that the Fed will begin its interest rate hike in March 2022 as signaled by many Fed officials. However, supply chain bottlenecks and labor shortages in the US will unlikely ease over the short term. Moreover, global oil prices that are projected to remain at elevated levels amid tight supplies and risks, arising from geopolitical issues among large oil producing nations, will likely cause the US inflation rate to remain at a high level. Meanwhile, a robust recovery has been seen in the US labor market. In December 2021, unemployment fell below 4 percent, to 3.9 percent, reflecting that the US labor market is approaching full employment while the impact of the COVID-19 Omicron variant on the US labor market is expected to be short-lived, meaning that the overall US workforce remains solid.
At the upcoming FOMC meeting, it is expected that the Fed will not send any new signals, except for its scheduled policy rate hike in March as earlier signaled and already priced in by markets. The move is intended to further assess the economic and inflation outlook amid the prevailing risks, including those stemming from geopolitical issues, the COVID-19 pandemic and global supply chain bottlenecks. Close attention must be paid to the FOMC meeting slated for March 2022 as the Fed is expected to raise its interest rates for the first time in more than three years, and disclose its economic projection and dot plot. Additionally, markets will have to monitor whether the Fed will change its stance, that is raising the policy rate four times instead of three times during 2022 as projected by some markets, or not, given that the US economy is growing at a robust pace and the inflation rate mains high. However, if economic risks increase, a majority of Fed members may decide to raise the Fed Funds rate only three times during 2022.
Regarding the impact of the scheduled Fed Funds rate hike on the Baht, KResearch is of the view that markets have already priced in such impact somewhat. If the Fed does not send any new hawkish signals at the upcoming meeting, it is expected that the Thai capital market will not be affected much. Meanwhile, the COVID-19 situation at home, along with easing lockdown measures and the reopening of the country to international tourists are factors that will drive the Baht’s strength, going forward.