Wonder why the FOMC statement this month was such a huge deal?
Here is a quick summary of what the policy makers announced and what it means for the US dollar, as well as the rest of the financial markets.
As you’ve likely heard, Fed Chair Jerome Powell and his fellow FOMC members agreed to raise interest rates by 0.25% as expected.
However, their statement and pressure had some hints of a shift in monetary policy bias.
Focus on the event:
Monetary Policy Statement from the Federal Open Market Committee (FOMC) on May 3, 2023
Expectations:
Our expectations
- The Fed raised interest rates by 25 basis points to a range of 5.0% – 5.25%.
- Chair Powell will probably signal a pause in rate hikes, but he’s doing his best to dampen 2023 rate cut speculation.
in our area Event guide for the May FOMC decisionWe mentioned that the Fed is likely to push ahead with another rate hike to keep inflationary pressures in check, but we also noted that it may drop hints of a pause in June.
After all, central bank officials have been particularly cautious about the risks of contagion in the banking sector, as well as the possibility of a “mild recession” later this year.
However, as is typical Powell style, we also suspect the key official is likely to highlight the strength of the labor market and their data-driven approach to justify keeping the door open for further tightening if necessary.
event result:
- The Federal Open Market Committee raised interest rates by 0.25% as expected from 5.00% to 5.25%, and policymakers noted that controlling inflation remains the overarching goal.
- Fed Chair Powell indicated that there was strong support for a rate hike and that a pause was not discussed during their meeting.
- Powell also mentioned that policymakers believe they are nearing the end of their tightening cycle, but that a cut would not be appropriate given inflation trends.
As discussed in the latest weekly report, the Federal Open Market Committee raised the interest rate by 0.25% in line with its target to control inflation.
However, Powell dashed hopes of seeing an end to his hiking spree anytime soon as he reiterated that there was strong support for rate hikes and that policymakers had not discussed a pause just yet.
He even reiterated that lowering interest rates would not be appropriate since annual inflation is still well above target.
Price reaction and takeaway:
The greenback has already had a rough start to the week, as mostly downbeat leading jobs indicators, government default concerns, and recession fears pushed the greenback south ahead of the FOMC statement.
Although Powell tried to play down the possibility of a hard stop, market players still took the FOMC decision as an “encouraging rally” because the dollar is still experiencing another bearish wave after the event.
Traders will likely focus on the fact that the Fed has removed the line from their official announcement saying that it “expects” that further rate increases will be needed. Tensions ahead of the non-farm payroll report, however, lingered in the following trading sessions, along with debt ceiling issues.
While the dollar managed to rally after the upbeat jobs data released on Friday, the currency was barely able to hold on to its gains, suggesting that traders may still expect the Fed’s rate hike cycle to end soon.
Given all of that, the dollar may give up ground to currencies with more hawkish central banks, namely the euro and New Zealand. It may even lose some of its safe-haven appeal to other lower-yielding currencies that have fewer issues to deal with, such as the yen or franc.
However, a major market shift to a risk off environment (eg: a mild global recession) could allow the dollar to remain afloat over the long term.