The FOMC sure knows how to keep the markets guessing! As usual, Chairperson Janet Yellen decided to play coy during the latest monetary policy statement, leaving most forex market watchers confused about the Fed’s rate hike timeline. Heck, even major financial news sites have varying headlines on the FOMC statement as analysts weren’t quite sure how to interpret these mixed signals!
1. FOMC could raise rates at ANY meeting
Perhaps the biggest question on every forex trader’s mind prior to the FOMC statement is “Will we see a rate hike by June or will the Fed wait until September?” After all, these are the months during which the FOMC announcement will be followed by a press conference when Yellen can have a chance to explain any policy changes.
However, Yellen clarified that they are not ruling out any particular months for a potential rate hike announcement. This basically implies that they can tighten anytime, with or without a press conference. In fact, the Fed showed off its dial-in news conference system to reporters recently, confirming that Yellen can be able to answer interview questions even without a scheduled press conference.
Forex analysts also noted that the FOMC dropped the phrases referring to a month-by-month assessment of economic performance in their official statement, suggesting that any policy adjustments will be purely dependent on data. The Fed simply specified that they would increase interest rates when “it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
2. Economic slowdown is just temporary
Instead of showing any signs of concern about the latest downturn in U.S. data, Fed officials reassured market watchers that the slowdown is just temporary. Policymakers attributed the subdued jobs growth and the slump in consumer spending to seasonal factors, citing that the winter months ushered in “transitory” factors.
Yellen even shrugged off the freshly-released GDP reading, which indicated a bleak 0.2% expansion for the first three months of the year. Compared to the previous quarter’s 2.2% GDP reading and the estimated 1.0% growth figure, that’s a huge disappointment!
3. Downgraded growth and employment outlook
Even though the Fed tried to maintain its “Keep calm and carry on” vibe, changes to their growth and employment outlook suggested that policymakers are slightly worried. In their previous statement, the FOMC noted that “labor market conditions have improved further” while their latest assessment indicated that “the pace of job gains moderated.”
Aside from that, the Fed also mentioned that “growth in household spending declined” and that “business fixed investment softened.” That’s a less upbeat tone compared to their March statement, which said that “household spending is rising moderately” and that business fixed investment is advancing.”
Long story short, the Fed thinks that economic performance could pick up soon but that the outlook for hiring and spending has weakened. Because of that, they will base any tightening decisions on their level of confidence regarding employment and inflation and that a rate hike might be announced absolutely anytime. If you’re confused, you ain’t the only one!
Investors also had a mixed reaction to the latest FOMC statement, as U.S. equities initially slumped then eventually rallied back to where they were trading prior to the actual event. Treasuries were also tossed around but ended more or less unchanged when the closing bell rang. Meanwhile, the U.S. dollar was sold off sharply before it erased most of its forex losses later on.
What’s your take on this week’s FOMC statement? Are you picking up on any strong clues? Don’t be shy to share ’em in our comments section!