- The Federal Reserve has left interest rates unchanged as expected.
- Concern about household spending tilts the needle against the dollar.
- A subtle shift on inflation may be a baby step toward leaving lower rates for longer.
Only two words have changed in the Federal Reserve's statement – but these minor modifications may make the difference for the dollar.
The first change is straightforward – the Fed has downgraded the language about household spending has changed from "strong" to "moderate." The bank is acknowledging that retail sales are perhaps not robust as it would want them to be.
Markets have mostly ignored it as consumer confidence – as measured both by the University of Michigan and the Conference Board – remains robust.
The second change is subtler.
The Committee judges that the current stance of monetary policy is appropriate to support sustained expansin of economic activity, stronger labor market conditions, and inflation
nearreturning to the Committee's symmetric 2 percent objective"
The Federal Reserve wants to see inflation – Core Personal Consumption Expenditure (Core PCE) – hit 2%, not just approach this level. These words are a distant – yet significant echo – to what Jerome Powell, Chair of the Federal Reserve, said in December 2019.
Back then, he said that he first wants to see inflation sustainably surpass the 2% target before considering raising rates. However, a deteriorating outlook would prompt a rate cut. This is asymmetric – projections would suffice for a cut while only hard evidence would trigger a hike.
Powell said that this position is his opinion – and now it seems to creep into the central bank's consensus.
Moreover, it could be the beginning of a strategic shift by the Fed – targeting 2% annual inflation over several years. That means that if Core PCE misses during one year with 1%, the Fed would tolerate 3% price gains in the following year – not rushing to raise rates.
And that would be dovish – weighing on the US dollar.
Is the Federal Reserve about to announce a strategic shift anytime soon? Probably not. Nevertheless, Powell and his colleagues may be laying the groundwork for a move later on.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.