3 Dovish Hints from the FOMC Statement

Hello, forex friends! The U.S. Fed delivered its rate decision and statement in their usual press release, but forex traders weren’t treated to a press conference, which is a real bummer. Nevertheless, the press release did offer some very juicy dovish hints for us to chew on.

1. Q4 2015 GDP may have slowed

The advanced estimate for Q4 2015 GDP is not due until Friday (Jan. 29, 1:30 pm GMT), but the Fed dropped hints of a possible slowdown in its press release when it stated that “economic growth slowed late last year.” The statement also noted that “Household spending and business fixed investment have been increasing at moderate rates,” which is a bit more reserved when compared to the previous assessment that were “solid” increase. Furthermore, the Fed continued to lament that “net exports have been soft,” but added in the recent press release that “inventory investment slowed.” Yikes!

But wait, there’s more! A look at the annualized GDP reading shows that GDP has been growing at an ever slowing rate. If the GDP did grow at a slower rate in Q4, then that means that the Fed hiked rates while the U.S. economy was slowing down. Anyhow, many forex trades will probably be watching tomorrow’s GDP release, so make sure to mark you forex calendars for that event.

Forex Snapshot: U.S. Annualized GDP

U.S. Annualized GDP

2. Lower inflation expectations

Moving on, the Fed still expects inflation to rise to 2% over the medium term, but they removed two key words: “reasonably” and “confident”. This implies that the Fed officials are no longer sure of meeting their forecasts over the medium term. In the shorter term, they explicitly added the phrase that inflation is to “remain low in the near term, in part because of the further declines in energy prices.” If they expect inflation to remain depressed in the near term, and they are no longer “reasonably confident” that inflation will rise to meet their target over the medium term, then a March rate hike is probably gonna be hard to justify, especially if Q4 2015 GDP did slow down.

3. Risks for growth no longer balanced

In the previous statement, the Fed expressed that “risks to the outlook for both economic activity and the labor market as balanced.” In the current release, they removed that phrase and replaced it with the statement that “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

In simple English that newbie forex traders can understand, Fed officials are saying that they’re not sure on how the recent developments are gonna affect their outlook for the labor market and the overall economy. However, it is probably safe to conclude that their outlook is no longer balanced, and is even likely skewed to the downside.

The Greenback’s forex reaction

USD Index 5-Minute Forex Chart

USD Index 5-Minute Forex Chart

The Greenback began getting buyers across the board a few hours before the FOMC, likely from preemptive positioning by forex traders. When the FOMC statement was finally released, the initial knee-jerk reaction was to buy up the Greenback, but the forex traders who opened preemptive positions were probably selling into the rally, so much so that the Greenback actually tanked later.

There was little follow-through buying from forex traders, however, probably because they took a good, hard look at the press release and noticed that the Fed wasn’t all that hawkish (and even sounded a bit worried).

Bonus: Spot the Difference!

Okay, you don’t really have to do that since I already did that for you. Well, I did get some help from the Wall Street Journal’s handy Fed Statement Tracker tool. For reference, you can read the Jan. 27 FOMC press release here and last year’s Dec. 16 FOMC press release here. Also note that words or phrases in parenthesis are from the Jan. 27 release while those which have a strike-through are from the Dec. 16 release. Duh! Also, the particular items that I focused on are colored red so that it stands out, like when you get a big red “F” on your report card, which never happened to me, by the way. Anyhow, the pertinent parts of the  the latest FOMC statement that got an overhaul are as follows:

Information received since the Federal Open Market Committee met in October (December) suggests that economic activity has been expanding at a moderate pace (labor market conditions improved further even as economic growth slowed late last year). Household spending and business fixed investment have been increasing at solid (moderate) rates in recent months, and the housing sector has improved further; however, net exports have been soft (and inventory investment slowed). A range of recent labor market indicators, including ongoing (strong) job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year (points to some additional decline in underutilization of labor resources). Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low (declined further); some survey-based measures of longer-term inflation expectations have edged down (are little changed, on balance, in recent months).

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will [continue to] expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to (remain low in the near term, in part because of the further declines in energy prices, but) to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely. (The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.)

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise (maintain) the target range for the federal funds rate to (at) 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

So, given the most recent FOMC statement, are you still expecting a rate hike by March? Let others know what you think in the poll and/or comment below!