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Hello, forex friends!

If you’re interested in the most important details of the most recent FOMC statement, or maybe you just want to know the reason why the Greenback tanked, then here are the key points that you need to know and remember.

1. FOMC members voted to maintain policy

Six FOMC meetings down and now only two more to go, and still no rate hike from the Fed. The Fed did say that “the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” In short, the Fed is in wait-and-see mode.

And in her prepared speech for the presser, Yellen explained the reason for the Fed’s lack of action as follows (emphasis mine):

“So why didn’t we raise the federal funds rate at today’s meeting? Our decision does not reflect a lack of confidence in the economy. Conditions in the labor market are strengthening, and we expect that to continue. And while inflation remains low, we expect it to rise to our 2 percent objective over time. But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives.”

2. And then there were three (dissenters)

Kansas City Fed President Esther L. George has been the most hawkish FOMC member among the lot. In fact, she has been voting for a rate hike since the March FOMC statement. Not only that, but she has also been the only hawk that actually walked the walk by dissenting from her peers and opting for a 25 bps rate hike.

The only time George wavered in her conviction was during the June FOMC meeting. That’s understandable, though, since Fed officials had to take the very dismal May NFP report into consideration.

Anyhow, George remained true to her beliefs and called for a 25 bps rate hike yet again. She was not the only one, though. This time around, George was accompanied by Cleveland Fed President Loretta J. Mester and Boston Fed President Eric Rosengren.

September's Voting Record
September’s Voting Record

This is not really all that surprising, though. If you were able to read up on my Updated Roundup of Recent Fed Statements, I quipped that “It sure would be interesting if she [Loretta J. Mester] joins Esther L. George in walking the walk.” I also pointed out that “Rosengren has historically been a dove … which is why his turnaround during a September 9 speech is kind of a big deal.”

3. Economic downgrades galore


FOMC Projections: GDP Growth

The Fed downgraded its GDP growth projection for 2016 from a median reading of 2.0% to 1.8%. And in her presser, Fed Head Yellen said that the downgrade was “a result of the weaker-than-expected growth seen in the first half of the year.”

On a more upbeat note, median GDP growth projections for 2017 and 2018 were maintained at 2.0% each. But on a more downbeat note, longer-run growth projections were downgraded from 2.0% to 1.8%, since U.S. economic growth is expected to moderate a bit in 2019.


FOMC Projections: Jobless Rate

The jobless rate as of the August NFP report was at 4.9%. And according to the Fed, it’s expected to tick lower to 4.8% by the end of the year. But as you can see on the table above, the Fed’s median projection back in June was for the jobless rate to settle at 4.7%.

The Fed, therefore, downgraded its projection for the jobless rate. And Yellen blamed this downgrade on the persistent slack in the labor market when she pointed out that “most measures of labor market slack have shown little change” despite the solid pace in job gains.


FOMC Projections: Inflation

The inflation forecast for 2016 was also downgraded from the median rate of 1.4% to 1.3%. However, forecasts for 2017 and 2018 were kept at 1.9% and 2.0%. The lower inflation projection for 2016 was attributed to the lower inflationary pressure from domestic demand due to the persistent slack in the labor market and weaker-than-expected economic growth in the first half of the year. Yellen remained optimistic, though, saying that:

“As transitory influences holding down inflation fade, and as the job market strengthens further, we continue to expect inflation to rise to 2 percent over the next two to three years.”

4. Even slower path to tightening (yet again)

The Fed projected that there would be room for 3-4 additional 25 bps rate hikes in 2016 when they finally hiked back in December of last year. However, U.S. economic developments and global risk factors didn’t evolve the way the Fed officials expected them to, so they downgraded their rate hike projections for 2016 from 3-4 to just 1-2 during the March FOMC statement.

Later, the Fed maintained that we can expect 1-2 hikes in 2016 during the June FOMC statement, but they downgraded their projection for 2017 from 5-6 hikes to just 4-5, with the current federal funds rate of 0.50% as the starting point. Fed officials also downgraded their rate hike projection for 2018 during the same meeting, from 10 rate hikes to just 7-8.

FOMC Projections: Path of Monetary Policy

And in yesterday’s FOMC meeting, the Fed did it yet again. This time, they lowered the projected path of monetary policy in 2016 from June’s 0.9% to just 0.6%. With the current federal funds rate of 0.50% as the starting point, that means that the Fed is now expecting only one 25 bps hike or even none at all for this year, down from June’s projected 1-2 rate hikes.

Rate hike projections for 2017 was also reduced from 1.6% to 1.1%. This means that we can only expect 2-3 hikes from the Fed, down from 4-5 hikes back in June. The same is also true for 2018, with rate hike projections being downgraded from 2.4% to 1.9%, or from 7-8 hikes to just 5-6.

The dot plot is even more disconcerting (for rate hike junkies). In the June dot plot, all of the FOMC members (including non-voting ones) were open to at least one 25 bps rate hike within the year, with six saying that they would agree to raise the target level for interest rates to 0.625% (means one rate hike at most) and nine opting for 0.875% (means at least two rate hikes).

June FOMC Dot Plot
June FOMC Dot Plot

But if you look at the recent dot plot, ten FOMC members now chose 0.625% as the target level while only three chose 0.875%. Not only that, there are now three FOMC members who chose 0.375% as the target level for the federal funds rate, which means that they firmly won’t support a hike this year.

September FOMC Dot Plot
September FOMC Dot Plot

The three dovish Fed officials weren’t identified, but as I noted in my Updated Roundup of Recent Fed Statements, Fed Governors Lael Brainard, Jerome H. Powell, and Daniel K. Tarullo were blatantly dovish, so they’re the most likely candidates.

5. The Greenback’s Reaction

The Greenback initially tossed and turned when the Fed released its official press statement and economic projections.

On the one hand, the Fed still has a hiking bias, and “the case for an increase in the federal funds rate has strengthened” to boot. Moreover, there were now three FOMC members who wanted a rate hike.

But on the other hand, the Fed did downgrade its economic projections for this year. Worse still, the Fed also downgraded its rate hike projections for this year from 1-2 hikes to just one (or none at all).

And so, after having searched their feelings for what they know to be true, forex traders realized that the FOMC statement was a disappointment overall, which is likely why they ultimately dumped the Greenback.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

So, are you still expecting a rate hike this year? Or maybe you feel vindicated because you have been saying that the December rate was just a means to boost the Fed’s credibility and was therefore likely a mistake, er, I meant to say a “policy error” as some economists who are critical of the Fed would call it.