Fed Quick Analysis: 3 Hawkish changes and one hike to send the Dollar up
|The Federal Reserve raised the interest rate to a maximum of 2.00% as widely expected. And the team led by Fed Chair Jerome Powell took 3 further steps that sent the US Dollar rising across the board.
1) Dot-plot upgrade: It was close but no cigar last time. Yet this time, the median forecast for the Federal Funds Rate for end-2018 rose to a total of four rate hikes from three hikes last time. This is an upgrade for the near future, not 2019, making a bigger impact than the minor move last time.
2) Acknowledging higher inflation: The opening paragraph of the FOMC Statement says that prices are on the rise, and it is not only fuel. "On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent". The Fed targets core inflation and it is finally on the rise. We learned that yesterday but getting the seal of approval from the central bank makes a difference.
3) No commitment to loose monetary policy: While the Fed does state that current policy is accommodative, it has dropped its pledge to keep its monetary policy accommodative. This is a big change. Here is the quote: "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation". The change is in what is missing.
All in all, the US economy is doing well and the Fed made changes that accumulate to a hawkish hike.
This is not the end of the story. Further market reactions are due to this major market-moving event.
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