Fed head Yellen sure rocked the forex market in the FOMC statement this week, as she set the tone for dollar trading in the near term. If you wanna understand why the Greenback is bringing sexy back, just take a look at these five takeaways from the FOMC statement:
1. Keep calm and carry on with tapering
As expected, Fed policymakers agreed to carry on with their plan to reduce asset purchases by $10 billion each month. Yellen also mentioned that the U.S. central bank will keep doing so “in further measured steps in future meetings” as officials also noted that a “highly accommodative stance of monetary policy remains appropriate.”
In other words, the Fed is on track to keep tapering in the coming months as long as the U.S. economy stays on the path to recovery. For now, Fed asset purchases stand at $55 million, down from the $85 million before the taper started in December 2013.
2. Removal of 6.5% unemployment rate threshold
When it comes to forward guidance and the possibility of seeing more adjustments to monetary policy, Yellen decided to drop the 6.5% unemployment rate threshold. Recall that former Fed head Bernanke specified that the FOMC would start considering rate hikes after the jobless rate drops below this level.
This isn’t so surprising, considering how Yellen has been hinting that the jobless rate is no longer an adequate measure of overall labor conditions. Although the latest NFP reading came in stronger than expected, she pointed out that the economy has a long way to go before achieving full employment and that there is a great deal of jobs market slack that they need to eliminate.
3. Changes in growth forecasts
Adding to Yellen’s cautious remarks regarding the labor market is the downgrade in growth forecasts for 2014. The Fed expects to see 2.8% to 3% growth this year, down from their previous estimate of 2.8% to 3.2%.
The good news though is that forecasts for the next couple of years have been upgraded. FOMC members projected that the U.S. economy will expand by 3% to 3.2% next year then by 2.5% to 3% in 2016. Policymakers also revised their unemployment rate forecasts lower.
4. Fed to hike rates next year?
With the upward revisions in growth forecasts for 2015 and 2016, most market watchers started buzzing about a potential Fed rate increase. Fueling rate hike speculations was Yellen’s hint that the FOMC could consider increasing the benchmark rate “something on the order of around six months” after ending asset purchases.
You can imagine what kind of a ruckus these words caused! As you’ve learned in the School of Pipsology, interest rate expectations tend to make huge waves in the forex market after all.
5. Yellen talks about qualitative guidance
Of course Yellen was quick to remind markets that the FOMC will take a much closer look at a wider range of economic information before deciding to tighten monetary policy. Yellen hinted that wage growth might play a role in determining policy adjustments, as these tend to impact consumer spending and overall growth.
From its previous forward guidance strategy, the Fed is now seen to take a qualitative guidance approach, wherein it might be less specific about economic targets and just decide to play it by ear. For some, this might mean less transparency when it comes to the Fed’s policy timeline, as Yellen downplayed the importance of rate forecasts.
Others believe that this is just the Fed’s strategy to manage market expectations and prevent volatile moves if U.S. data keeps showing strong results. Do you think the latest FOMC statement is enough to keep the dollar supported in the long run? Cast your votes in our poll below!