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Greetings, forex friends! If you somehow missed it, the Fed released its official FOMC press statement yesterday. And as a result, the Greenback tanked pretty much across the board. Wait, what? What happened? What did the Fed have to say? Well, here are the three key takeaways from the February FOMC statement that you need to know about.

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

1. Unanimous decision not to hike

For the first FOMC monetary policy statement of the year, Fed officials decided to unanimously vote against hiking rates in order to support “some further strengthening in labor market conditions and a return to 2 percent inflation.”

FOMC: January Voting Record
FOMC: February Voting Record

2. Upbeat assessment of U.S. economy, but…

Overall, the Fed gave a positive assessment of the U.S. economy. With regard to inflation, however, there were some not-so-hawkish undertones.

Growth

According to the Fed, “economic activity continued to expand at a moderate pace,” thanks to the moderate rise in household spending. The Fed did note that “business fixed investment has remained soft,” though.

Hmm. It seems the Fed isn’t too bothered by the slower annualized quarter-on-quarter growth in Q4 (+1.9% vs. +3.5% previous), which was largely due to the drag from trade. But then again, the Fed is more focused on the year-on-year reading, and that printed a 1.9% increase (+1.7% previous), which is in-line with the Fed’s projections. Furthermore, the 1.9% increase in Q4 is the best in four quarters. In addition, it also marks the second consecutive quarter of ever faster GDP growth, at least on a year-on-year basis.

Fed: GDP Projections

Looking forward, the Fed expects that the U.S. economy will continue to expand at a moderate pace. The Fed also noted that “Measures of consumer and business sentiment have improved of late.” Finally, the Fed didn’t change its assessment of the risks to its outlook, saying that “Near-term risks to the economic outlook appear roughly balanced.”

Labor Market

With regard to the labor market, the Fed said that the labor market “continued to strengthen.” True, the recent net increases in non-farm payrolls have been misses more often than not. However, they’ve also been above the 100K jobs per month that’s needed to keep up with working-age population growth, so they’re still pretty solid. Also, the jobless rate for December came in at 4.7%, which is also in-line with the Fed’s projections.

Fed: Jobless Rate Projections

Anyhow, the Fed also repeated its usual line that “labor market conditions will strengthen somewhat further.” By the way, if you’re planning to trade the NFP report this Friday, then you may wanna check out my Forex Preview for January’s NFP report.

Inflation

Moving on to inflation, the Fed acknowledged that inflation increased. Although the Fed still lamented that inflation “is still below the Committee’s 2 percent longer-run objective.”

However, the Fed also deleted the phrase “partly reflecting earlier declines in energy prices and in prices of non-energy imports.” This is very noteworthy because this means that the Fed thinks that the deflationary effects from these items (lower oil prices mainly) have already passed through, but inflation is still unsatisfactorily low.

In addition, the Fed said that “Market-based measures of inflation compensation remain low.” This is a very noticeable shift from its more hawkish tone during the December FOMC statement when the Fed said that “Market-based measures of inflation compensation have moved up considerably but still are low.”

Aside from the switch to a not-so-hawkish tone, persistently low market-based measures of inflation compensation (based on Treasury Inflation-Protected Securities mainly) have a more direct impact on inflation. After all, they show how the market expects inflation would evolve over time, which also affects how companies and consumers make economic decision, such as the price that a consumer is willing to pay for a product or service, or the wages a company is willing to pay its employees.

In effect, if market-based measures of inflation compensation remain low, then inflation could get depressed in a sort of self-fulfilling prophecy kind of way. Worse, these measures remain low despite the recent rise in CPI, as well as the recent rise in U.S. bond yields, which should have given these measures a boost. These measures are therefore low very likely because the market expects inflation to remain low. As such, the Fed therefore has little wiggle room to hike rates further for now.

On a more upbeat note, the Fed did say that “Inflation will rise to 2 percent over the medium term.” This a noticeably more forceful and confident tone compared to December’s statement that “Inflation is expected to rise to 2 percent over the medium term.” Although this could be taken as an attempt to boost inflation expectations, if you’re the really cynical type.

3. No forward guidance

Unfortunately, the Fed didn’t really give any hints if it would be hiking again anytime soon, which is a real bummer. Instead, the Fed had its usual statement as follows:

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Other than that, the Fed also refrained from even mentioning Trump’s fiscal policy and how monetary policy would react to that, which is also a real bummer. I guess we’ll probably know more if Fed Head Yellen is forced to spill the beans when she testifies before the Senate Banking Committee and the House Financial Services Committee in a couple of weeks.

Final Thoughts

The Fed was widely expected to keep rates steady, so no surprises there. However, the not-so-hawkish undertones of the Fed’s inflation assessment was unexpected. The statement that “Market-based measures of inflation compensation remain low,” in particular, is being cited by market analysts as being the most important.

Also, it’s rather disappointing that the Fed refrained from providing any forward guidance on when the next rate hike would be. And as a result, rate hike probabilities took a hit across the board, according to the CME Group’s FedWatch Tool. And thanks to rate hike expectations getting hit, the Greenback also took a tumble against its forex rivals.

Going back to rate hike probability, a 25 basis point rate hike in the next FOMC meeting in March only had a 17.7% probability, down from 20.3%.

March FOMC Expectations (As of February 1. 2017)
March FOMC Expectations (As of February 1. 2017)

A June rate hike, meanwhile, deteriorated from 69.4% to 67.1%. By the way, rate hike probabilities don’t go above 50% until June.

June FOMC Expectations (As of February 1. 2017)
June FOMC Expectations (As of February 1. 2017)

Oh, for the newbies out there who have no idea how to read the CME Group’s FedWatch Tool, or have no idea what’s it all about, you can check out my quick primer about it here.

Having said that, do you still think that the Fed is on track for three rate hikes this year? Share your thoughts by answering the poll below!

 

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