July FOMC Statement: The Expected and the Unexpected

Now that the FOMC has given its monetary policy statement, let’s have a quick rundown of what happened and what it means for the dollar.

The Expected

As I wrote about in my preview article on the 3 Things to Expect from the July FOMC Statement, Fed officials did decide to taper asset purchases by $10 billion and stay on track towards ending their stimulus program by October this year. Since there was no press conference after the actual announcement, market watchers paid extra attention to the changes in wording and tone of the FOMC statement.

With NFP and CPI data showing improvements for the past few months, the Fed decided to alter its assessment of employment and inflation. From their previous statement saying that “unemployment, though lower, remains elevated,” their current statement mentioned that “labor market conditions improved, with the unemployment rate declining further.”

As for inflation, their June statement indicated that “inflation has been running below the Committee’s longer-run objective” while the July statement showed that “inflation has moved somewhat closer to the Committee’s longer-run objective” and added that “the likelihood of inflation running persistently below 2% has diminished somewhat.”

The Unexpected

FOMC Tightrope

Is the Fed being too cautious?

What I didn’t see coming for this month’s FOMC statement was the dissent by member Charles Plosser, who objected to the forward guidance indicating that interest rates might stay at their current levels for a “considerable time after asset purchases end.” For him, this statement is time-dependent and does not reflect the considerable progress in the U.S. economy.

All in all, it appears that the Fed is beginning to acknowledge the improvements in the U.S. economy but is stopping short of switching to a more hawkish bias with its statements. After all, policymakers probably didn’t want to shock the markets by confirming that the Fed is moving closer to hiking interest rates.

The dollar had a volatile reaction to the announcement but ended up returning some of its recent gains from the stronger than expected U.S. GDP release. Moving forward, the dollar might still appear uneasy about going for more rallies unless the Fed starts showing clearer signs of heading towards tightening. Do you agree? Share your thoughts in our comment box or cast your votes in our poll below!

  • ForExchange

    Hi Forex Gump,

    your forecast was great yesterday!

    I have a question regarding to a sentence almost at the end of your article: “Moving forward, the dollar might still appear uneasy about going for more rallies unless the Fed starts showing clearer signs of heading towards tightening.” Although interest rate dovishness does not help a currency, but don’t you think that the strong economic US reports (and weak economic reports from other countries) is enough for further USD rally? Maybe it will still rally without interest rate bullishness. What is your opinion on that?

    Thanks

    • Thanks for the kind feedback! I do agree that consistent US data could lead to more gains for the US dollar, but the rallies might be slow until the Fed actually acknowledges that it’s about time they consider tightening policy. Just my two pips of course! It depends on how strong the data is, as very positive figures could lead to early pricing in of rate hikes and consistent gains for the dollar.

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