Will the Fed hike interest rates in September or what? Take a look at these takeaways from this week’s FOMC statement to figure out what’s next for the U.S. dollar’s forex trends.
1. FOMC was less hawkish than expected
With the U.S. economy on stable footing and with the next FOMC statement scheduled to take place in September, most forex market watchers had been expecting the Fed to drop strong hints on monetary policy adjustments. But, as always, Yellen stayed mum on when their liftoff might take place and reiterated that any potential rate changes would continue to be data-dependent.
Even without giving any explicit confirmation for an interest rate hike, the Fed still sounded upbeat with its economic assessment and outlook. Policymakers noted that economic activity has been expanding moderately and that additional improvements were seen in the housing sector. However, Fed officials also pointed out that business fixed investment and net exports remained soft.
Here’s how the U.S. dollar reacted to these mixed signals:
2. September rate hike still on the table?
It seems that most traders just couldn’t shake off their September rate hike expectations, as the Greenback still managed to advance against its forex rivals after the FOMC statement. Some analysts say that the latest statement is probably the most hawkish one we’ve seen in a while since the Fed altered a few phrases in their announcement.
For one, the statement acknowledged the improvements in employment and dropped the word “somewhat” when it comes to discussing the reduction in labor market slack. In addition, policymakers added the word “some” in describing how much improvements they’d like to see in the jobs market before hiking rates.
Take note, however, that the Fed also omitted the sentence from their June policy statement saying that “the transitory effects of earlier declines in energy and import prices” are fading. This suggests that committee members are a bit worried about another likely downturn in inflation due to recent commodity price tumbles.
3. Next two NFP releases to make or break the dollar’s trend
Perhaps the biggest takeaway from the July FOMC statement is that Fed officials will be paying extra close attention to employment data. Keep in mind that the U.S. economy still has a couple of NFP releases lined up before the September FOMC statement so these reports could either seal the deal for Fed tightening or convince policymakers to delay their liftoff.
Don’t forget that the Fed also wants to be “reasonably confident” that inflation could reach its 2% target before giving the go signal for a rate hike, which means that commodity trends could also play a role in tightening expectations. But even with another dip in price levels in the coming months, significantly strong employment gains could still keep the U.S. central bank on track to increase interest rates before the end of this year, whether it’s in September, October, or December.