The US dollar was falling ahead of the Fed’s statement and could not strengthen even after. Let’s look why the Fed could not support the USD.
The central bank has announced an interest rate, and, as expected, it was raised by 25bp. The Fed based its decision on the strengthening economy. The line that the “economic outlook has strengthened in recent months” was added to the statement.
Key points of the Statement:
- Although inflation is still below the Fed’s target of 2%, it showed a positive dynamics. So it is expected to move up in coming months (in the last statement Mr. Powell talked about the year, not months);
- Job gains were strong and unemployment was low;
- Near-term risks to the economic outlook are roughly balanced, however, the Fed will look at the inflation development closely;
- However, despite positive assessments of the economy, the committee’s forecast for the long-run sustainable growth rate of the economy was unchanged at 1.8 percent;
- The Chairman said that the stance of the monetary policy remains accommodative;
- Trade wars were not considered in the outlook.
And what about future rate hikes?
According to economic projections, Fed officials are split on whether two or three additional interest rate increases will be needed this year. So Mr. Powell said their future policy will highly depend on the economic data. Too fast rate hikes can negatively affect the inflation.
Although rate hikes are supposed to support a domestic currency, the greenback was weak ahead and during the Fed’s statement. First of all, an unstable environment in the White House, a possibility of trade wars, and NAFTA negotiations are highly affecting the USD now. Secondly, the rate hike was so predictable, that investors did not react to it a lot. More likely, that one rate hike will not be able to support the US dollar in the long-term.