Trying to make sense of the Greenback’s wild moves during the FOMC statement? The U.S. currency sold off sharply right around the event but made quite a comeback instantly. Did the Fed lose its “patience” or what?!
Why, yes they did! FOMC members confirmed that they are moving closer to hiking interest rates sometime this year, as they removed the phrase saying that they “can be patient in beginning to normalize” monetary policy. The Fed still maintained that the current level of low interest rates is appropriate and that the committee will continue to assess the economy’s progress in achieving its target inflation and employment levels.
Now, hold your horses before y’all start pricing in expectations of a June rate hike. While the recent U.S. jobs figures indicate strong improvements, inflation data has been far from impressive. This has led some analysts to predict that the Fed might actually wait until September before tightening.
As I’ve noted in my Monthly Review for the U.S. Economy, consumer price levels have been dragged lower by the oil price slump and probably haven’t bottomed out yet. Annual CPI is down 0.1% in January while the core PCE price index, which is rumored to be the Fed’s preferred inflation measure, is up by 1.3% – still a long way off the 2% target and vulnerable to further declines.
To top it off, the Fed’s revised economic projections suggest that they’re not too confident about the ongoing recovery just yet. They downgraded their growth forecasts for this year from their December estimate of 2.6% to 3.0% to just 2.3% to 2.7% and also lowered their inflation estimates for 2015 and 2016. Apart from that, Fed officials projected a slower pace of interest rate increases.
So to wrap it up… The Fed foresees lower growth and inflation but is no longer ‘patient’ in considering rate hikes? What’s up with these mixed signals?
“Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient,” Yellen clarified during the press statement. After all, the U.S. economy may have seen a lot of economic improvements but there’s no denying that a lot of work still needs to be done.
And for the million-dollar question: What does this mean for the U.S. dollar?
The initial forex reaction to the actual statement suggests that dollar bulls were disappointed, as the Fed rhetoric wasn’t as hawkish as they’d hoped it would be. However, this doesn’t change the notion that the U.S. central bank is probably the only one moving closer to a rate hike while the rest are staying dovish. Heck, even with the downgraded growth and inflation forecasts, the U.S. economy is still likely to outpace its peers!
With that, the U.S. dollar could continue to be supported against its forex rivals in the longer run, with ongoing trends likely to stay intact. Do you think the knee-jerk reaction to the FOMC statement is a good chance to hop in those dollar trends?