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. 

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