Powell's Power Play: 6 hawkish developments, USD has room to resume gains

  • The Fed made a hawkish hike on all fronts with 6 USD bullish developments. 
  • Fed Chair Powell tried smoothing things, pushing the USD back to the drawing board.
  • The overall picture remains upbeat for the greenback and it could resume its rises.

The Federal Reserve raised rates as widely expected but surprised on other fronts.

Here are six hawkish moves that accompanied the hike:

Hawkish hike

1) No more pledge for loose policy: For years and years, the Federal Reserve promised to keep monetary policy accommodative in order to keep markets calm. This changed with this June 2018 Fed decision as the FOMC Statement only stated that current policy is accommodative, but made no pledge.

2) Fed gives a nod to higher inflation: The fresh inflation report for May showed an acceleration in Core CPI to 2.2% YoY and the Fed acknowledged it. The statement included wording about a higher headline, oil-fueled inflation, and also an increase in core inflation. This is meaningful.

3) From 3 to 4 hikes: The dot-plot finally moved: a total of four hikes is now on the cards for 2018 and odds for a rate hike in September are higher. The previous dot-plot saw only three hikes but was close to four. We are now over the line, and for the near term, not the future.

4) The economy is strong: This is a quote from Powell who was very bullish on the economy, on growth, and on employment. Powell said that every person that wants a job can find a job. Such optimism has not been seen for quite some time. 

5) Press conference in every meeting: Looking a bit forward, Fed Chair Jerome Powell will hold a press conference after every meeting, starting from January 2019. This will allow for more rate hikes as every meeting will be considered live.

6) Flat yield curve? So what: Reporters asked Powell about the flatter yield curve and he plainly said that this is just a result of the rate hikes that the Fed is conducting. He dismissed the concern about a topic that pundits have been pondering on for months and that implies a recession in the horizon.

So why did the US Dollar retreat after the rise? And why it could rise

Powell was not only optimistic but also somewhat cautious. Regarding wages, Powell said that the lack of rises in salaries remains puzzling and said they "should" go up and not "will". The lack of conviction about the future is not surprising as wages have disappointed time after time.

Nevertheless, the accumulation of hawkish moves gives a knockout to some caution. 

The full reaction to the Fed often takes a few more trading sessions. There is a higher chance that markets will push the US Dollar higher rather than lower once the details of the Fed decision are fully digested. 


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