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Fed React: Dollar pares earlier losses after the Fed’s attempt of a hawkish skip – MarketPulse

Date:

  • Fed kept rates steady; target range remained at 5.25%-5.50% (as expected)
  • Dot plots showed 12 of 19 expected policymakers (12 also called for one more hike in June)
  • Fed projections saw rate cut bets halved from June’s 5.10% to 4.60%

US stocks dropped and king dollar returned after the Fed kept rates unchanged and signaled one more rate hike will happen this year.  The US economy is too strong and this rate hiking cycle will last a lot longer than Wall Street wants.

It is clear that higher-for-longer will be the Fed’s theme for a while given the summary of economic projections (SEP) revisions.  The slowing economy will happen, but the growth and unemployment targets that the Fed is setting is concerning.  The FOMC statement noted that “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

If we continue to see an extended period of time that the economy performs well, the growth/inflation mix will lead to a harder hitting lag from their rate hiking cycle. 

The Fed still believes the soft landing will happen, but a few more stickier inflation reports and that will make those 2024 rate cut bets disappear.  Higher rates are not going away as it seems US economic resiliency is here to stay.  The 2-year Treasury yield initially surged on the release of the statement and SEP, rising 4bps to over 5.14%.

Fed Chair Powell’s opening emphasized a long list of reasons on why they will need to keep up the hawkish rhetoric: The economy has been expanding faster than expected this year. Consumer spending has been “particularly robust.” Housing has “picked up somewhat.”

The path of policy will adjust meeting by meeting, but it seems the incoming data might support additional tightening by year-end. Powell’s comment that the Fed is in a position to proceed carefully on firming rates took away some of their hawkishness. 

Powell wants convincing evidence that inflation is under control and that won’t be happening anytime soon given the gas price trajectory and the current state of the labor market. 

Dollar firmer post Powell (EUR/USD 5-minute chart): 

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Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA

With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.

Ed Moya

Ed Moya

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