What’s Up with the FOMC’s Hawkish Tone?

The FOMC is just full of surprises, isn’t it? While their September rate decision turned out surprisingly dovish, the tone of their monetary policy statement this month was the exact opposite!

As expected, the Fed decided to carry on with its taper schedule, effectively ending their QE program with a $15 billion monthly reduction in asset purchases. The committee also decided to retain the “considerable time” wording when it comes to discussing how long they plan to keep interest rates unchanged.

hawkish fomc strong usdTheir economic assessment was relatively more upbeat this time around, as policymakers seemed more optimistic about employment and inflation prospects. Their statement acknowledged the solid hiring gains and the lower unemployment rate, citing that the underutilization of labor resources is “gradually diminishing”, modified from their previous statement referring to a “significant underutilization” in labor resources.

As for inflation, Fed officials still projected that near-term price pressures might be weighed down by falling energy prices but added that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.” Forex market participants interpreted this as a sign that the FOMC is less concerned about deflationary risks brought about by dollar appreciation for now.

With that, several analysts remarked that the Fed is back as one of the more hawkish central banks in the ‘hood. Some were even surprised to find out that Fed Chairperson Yellen and her gang of policymakers didn’t dwell too much on the negative impact of a euro zone recession and the slowdown in China. Judging from the Greenback’s reaction, it looks like forex traders are once again pricing in expectations of a Fed rate hike by mid-2015!

Of course a lot could still happen until then and not even Yellen can guarantee that the U.S. will stay on track to recovery in the midst of a potential global economic downturn. Do you think the U.S. economy could stay ahead of the pack in the next few months?

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  • Woah, thanks for sharing those thoughts. I agree that market sentiment is playing a bigger role in price action these days, as currencies are hitting extreme levels and may have no more room to extend their rallies/drops. Besides, we’ve also got the end of the year to think about, which would mean more profit-taking around these current levels for USD longs. Better wait for larger corrections or maybe the start of a new trading year before re-establishing fundamental biases, you think?

    • ForExchange

      Hi Forex Gump!

      Yeah, I agree with you. Markets are really choppy, I rather trade commodities these days. I am in many currency trades too, but only long term trades. Short term setups do not make sense for me in these last 1-2 months. It really look slike gambling to me when I want to get 50-100 pips.

      FE

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