Just when most forex market watchers (myself included) were playing it safe ahead of a potentially downbeat FOMC statement, Fed head Yellen and her gang of policymakers proved that they could not be outsmarted.
While the interest rate hike to 0.50% has been priced in for quite some time, not a lot of forex traders were able to predict that U.S. central bank officials would go full-on hawkish mode. Here are some of the positive takeaways from their announcement.
1. Unanimous rate hike vote
Over the past few weeks, Fed officials seemed to have mixed feelings when it comes to a December liftoff so it was pretty surprising to see a unanimous vote to hike interest rates. This implies that even the most cautious policymakers such as Evans and Dudley were in agreement with the more upbeat ones like Williams and Lockhart when it comes to tightening monetary policy sooner rather than later.
2. Upgraded economic forecasts
The FOMC also published their updated forecasts for growth, unemployment, and inflation – important figures that play a role in setting the timeline for their future policy decisions. Compared to their previous projections released back in September, the estimates showed that Fed officials are more optimistic about growth and employment next year.
The 2016 GDP estimate was raised from 2.3% to 2.4% while the ones for this year, 2017, and 2018 were left unchanged. Their unemployment rate forecast for next year was lowered from 4.8% to 4.7% while the estimate for this year was maintained at 5.0%.
On the other hand, inflation forecasts for 2016 suffered slight downgrades. The Fed projects that the PCE inflation reading and its core version will come in at 1.6%, down from their previous 1.7% estimate.
3. Unchanged rate hike dot plot
Interestingly enough, even with all the road bumps in the U.S. and the global economy lately, FOMC policymakers still maintained their rate hike projections.
If the dot plot looks like weird aliens to you, lemme break it all down. For this year, majority of policymakers saw interest rates being raised from 0.25% while the committee predicts that at least two rate hikes will take place next year. From there, Fed officials see a more gradual path of tightening moves, eventually taking borrowing costs to around 3.50% down the line.
4. Yellen’s positive tone
The Greenback had been hesitant to advance against its forex peers right after the release of the FOMC statement, thinking that Fed Chairperson Yellen might have some cautious remarks up her sleeve. But instead of being her usual coy self, the Fed head honcho didn’t shy away from sharing her optimistic economic outlook for the U.S. economy.
Although she did say that there’s still a lot of work to be done, she also gave Uncle Sam a pat on the back for making progress. She mentioned that the economic recovery could carry on at a moderate pace and that labor market indicators would continue to strengthen, adding that external risks have diminished.
With that, U.S. equities also took off, as the Fed’s positive economic assessment and outlook also spurred risk appetite. The Greenback was also able to score a few tentative gains when Yellen’s press conference ended without any dovish remarks, although forex traders might be waiting to reestablish their long dollar positions by next year.