Fed Quick Analysis: Sell the rumor, buy the USD? Fed dovish, but perhaps not enough

  • The Fed has left the main rate unchanged but has cut the IOER, a technical move.
  • The message has been broadly balanced.
  • Markets had seen a rate cut coming soon, and they may have gotten ahead of themselves. 

Headline writers can scream "the Fed cut rates", but this is premature and may remain so for quite some time, not justifying the slide in the value of the US Dollar. The FOMC has announced a technical cut of 5 basis points on the interest rate on excess reserves known to wonks as the IOER. The move has been framed as technical and rightfully so. This is not a precursor to a rate cut.

And what about the Fed's inflation mandate? The central bank has acknowledged the drop, but it is hard to find any sense of urgency. Here is the quote, emphasis mine:

On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed

So, the Fed acknowledges the short-term reality but is not worried. The language is similar to the one seen in the previous statement. 

And, the Fed's message on its other mandate has been slightly upgraded. Here is its wording on employment:

Job gains have been solid, on average, in recent months, and the unemployment rate has remained low

All in all, the message is quite balanced. However, even the world's most powerful central bank does not operate without influences. Markets expected a more dovish language given the weak level of inflation. Bond markets see a rate cut by year-end.

Moreover, the Washington-based institution has been under massive pressure from another Washington-based one: the White House. President Donald Trump has been bashing the Fed and has even called for a rate cut, over and over again.

On this background, even if the interpretation of the Fed's message on inflation is dovish, it may not meet markets' and politicians' dovish expectations. 

The US Dollar initially dropped in reaction to the statement, but markets may be mistaken. A rate cut is not imminent, and the greenback can gain ground when they join the Fed in acknowledging reality. 

Follow our live coverage of the Fed decision

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.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD hits two-week highs near 1.11 amid trade hopes

EUR/USD is rising toward 1.11, trading at the highest since November 5. Hopes that a US-Sino trade deal may be reached are improving the market mood and weighing on the safe-haven dollar. 


GBP/USD reverses and hits fresh lows near 1.2910

The GBP/USD pair dropped from the highest level since Monday at 1.2969 to 1.2912, slightly above Asian session lows. The reversal took place amid a stronger US dollar across the board.


USD/JPY bounces-off 50-DMA but lacks follow-through

USD/JPY has bounced up from the 50-day MA support of 108.28. China's Vice Premier Liu He is cautiously optimistic about the prospects of the US-China trade deal. Related markets, however, are not buying Liu He's optimism, keeping the recovery in check. 


US Dollar Index looks volatile below 98.00, attention stays on trade

The US Dollar Index (DXY), which tracks the buck vs. a bundle of its main competitors, alternates gains with losses on Thursday around the 97.80/90 area.

US Dollar Index News

Gold: Remains vulnerable below 100-day SMA

Gold seems to have stalled its recent corrective bounce from three-month lows and witnessed a modest pullback from previous support, now turned resistance near 100-day SMA.

Gold News

Forex Majors