In their much-anticipated blockbuster event this week, FOMC officials announced their decision to keep interest rates unchanged at 0-0.25% for the nth time since the height of the 2008 financial crisis. This turned out to be quite a downer for the hardcore dollar bulls who were expecting the liftoff to happen this month, but does this really mark the start of a longer-term forex selloff for the Greenback?
The Fed’s decision to stand pat wasn’t really unexpected, as a bunch of forex junkies (myself included!) already predicted that policymakers would put the spotlight on the slowdown in China and its potential repercussions on the global economy. Besides, Fed head Janet Yellen typically prefers to err on the side of caution so it’s highly unlikely that she would give the green light for tightening amid all these uncertainties.
Speaking of uncertainties, FOMC members neatly summed up the factors that convinced them to sit on their hands for the time being by noting that “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” As always, they also emphasized that they’d like to see further improvements in employment and be reasonably confident that inflation can move towards their target before hiking rates.
In that case, a rate hike this year might still be a possibility and the Fed has a couple more interest rate statements (mid-October and December) to go before 2015 comes to a close. In fact, 13 out of the 17 FOMC members still believe that the liftoff can take place this year, down from the previous 15. One member, Richmond Fed President Jeffrey Lacker, actually voted to increase the benchmark rate right there and then while another policymaker suggested taking interest rates to the negative territory.
Even so, the latest dot plot of interest rate projections from Fed officials shows that majority still expect rates to be lifted above 0.25% this year, boosted further past 1% by 2016, and turned into a nice little Christmas tree in the longer run.
Interestingly enough, policymakers upgraded their growth forecasts for 2015 while downgrading their estimates for growth, inflation, and employment in the next couple of years. Talk about mixed signals, eh?
With that, upcoming top-tier U.S. data could continue to influence interest rate hike expectations throughout the remainder of the year, with strong figures likely to spur dollar domination in the forex arena. Fans of the mighty Greenback could revive dollar rallies leading up to the next FOMC meetings, especially if economic reports suggest that the U.S. is able to maintain its slow but steady pace of improvement.
Of course the dollar’s nasty selloff after the announcement can’t be ignored, but this may have just been a knee-jerk forex reaction to the disappointing news. At the end of the day, the Fed is still on track towards tightening monetary policy at some point, in contrast to most of its central bank peers that are staying open to further easing.