Wondering why this month’s FOMC statement was a huge deal?
Here’s a quick rundown of what policymakers announced and what it means for the U.S. dollar, as well as the rest of the financial markets.
As you’ve probably heard, Fed head Jerome Powell and his fellow FOMC members agreed to hike interest rates by 0.25% as expected.
Their official statement and presser, however, had some hints about a shift in monetary policy bias.
Event in Focus:
Federal Open Market Committee (FOMC) Monetary Policy Statement on May 3, 2023
Expectations:
Our Expectations
- Fed to raise its interest rates by 25 basis points to the 5.0% – 5.25% range
- Chairman Powell will likely signal a pause in rate hikes but do his best to discourage rate cut speculations for 2023
In our Event Guide for the May FOMC decision, we mentioned that the Fed will likely push through with another rate hike to keep inflationary pressures in check but also noted that they might drop hints about pausing in June.
After all, central bank officials have been particularly cautious about banking sector contagion risks, as well as the possibility of a “mild recession” later this year.
Even so, as in usual Powell fashion, we also suspected that the head honcho would likely highlight the strength of the labor market and their data-dependent approach to justify keeping the door open for further tightening if necessary.
Event Outcome:
- FOMC hiked interest rates by 0.25% as expected from 5.00% to 5.25%, policymakers noted that controlling inflation remains the top goal
- Fed head Powell noted that there was strong support for interest rate hikes and that a pause was not yet discussed during their meeting
- Powell also mentioned that policymakers believe they are approaching the end of their tightening cycle but that cutting would not be appropriate given inflation trends
As discussed in our latest Weekly Recap, the FOMC came through with its 0.25% interest rate hike in keeping with their goal to control inflation.
However, Powell dashed hopes of seeing an end to their hiking spree anytime soon since he reiterated that there was strong support for rate hikes and that policymakers didn’t even discuss pausing just yet.
He even reiterated that cutting interest rates wouldn’t be appropriate since annual inflation remains well-above target.
Price Reaction and Takeaway:
The dollar was already off to a rough start for the week, as mostly downbeat leading jobs indicators, government default concerns, and recession fears dragged the U.S. currency south prior to the FOMC statement.
Even though Powell attempted to downplay the possibility of a tightening pause, market players still seemed to treat the FOMC decision as a “dovish hike” since the dollar still suffered another wave lower after the event.
Traders likely zoned in on the fact that the Fed omitted the line from their official announcement saying that it “anticipates” further rate increases would be needed. Besides pre-NFP jitters remained in play in the next trading sessions, along with debt ceiling issues.
While the dollar managed to pop higher after upbeat jobs data was printed on Friday, the currency was barely able to hold on to its gains, suggesting that traders might still be anticipating an end to the Fed’s rate hike cycle soon.
Given all that, the Greenback might stand to give up ground to currencies with more hawkish central banks, namely the euro and Kiwi. It could even lose some of its safe-haven appeal to other lower-yielding currencies that have fewer issues to deal with, such as the yen or franc.
Still, a major market shift to a broad risk-off environment (ex: not-so-mild global recession) could allow the dollar to stay afloat in the longer run.
