After a more-dovish-than-expected stance from Jerome Powell, questions have arisen the markets: Will there be any rate hikes this year? Is the Fed about to turn the direction of its monetary-tightening policy? Will the US Dollar turn bearish in the coming months? Our stellar panel of chief analysts discusses it in the wake of an interesting Fed meeting and before the release of the second US jobs report of the year, an interesting one as it might show the potential ill-effects of the US government shutdown.
Fed Interest Rate Decision
There were no surprise changes to monetary policy itself in Fed's meeting but there were some interesting hints about how policymakers see monetary policy evolving over the rest of the year.
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FED Latest Analysis
January FED DECISION review
The Federal Reserve made a significant dovish shift in its statement. The US Dollar dropped for five main reasons. Given the magnitude of the change, there is room for further pressure on the US Dollar. The Fed made a significant shift in interest rates and moved from hawkish to neutral, preaching patience on the next moves. This is not a slowdown but a total halt. There are now no rate hikes on the horizon. The Fed aligned itself with markets.
Following its meeting today, the FOMC released a statement that provided some additional clarity on the outlook for the balance sheet. While some answers are emerging, others are still awaiting further guidance. One question answered, while others remain...
The Fed abandoned any hints of a hawkish bias and shifted to a neutral, 'patient' approach. The US dollar sank on the FOMC while the Australian dollar was the top performer on the day. The China PMIs are up next with Canadian GDP due later. A new Premium trade has been issued with 2 charts and 5 supporting points.
December FED DECISION review
The Federal Reserve raised the interest rate to a range of 2.25-2.50% as expected. They also remain quite optimistic. The dot-plot was downgraded from three to two hikes in 2019, but well above half a hike that bond markets foresaw. That is far from a dovish hike.
The Fed has hiked its policy rate 25bp to 2.25-2.5% as widely expected, but there is a dovish narrative to the accompanying press release and forecast pace. Having signalled back in September that 3 rate hikes in 2019 was the most likely scenario, 5 FOMC members lowered their projection so the median forecast is now for just two 25bp moves in 2019.
The financial markets shot down the notion that the Fed delivered a dovish rate hike at the December FOMC meeting. The yield curve flattened, the dollar strengthened and the stock market sold off sharply.
What's important about Federal Reserve’s monetary policy meeting?
With a pre-set regularity, a nation's Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one, being the interest rate that it will charge on loans and advances to commercial banks.
In the US, the Board of Governors of the Federal Reserve (FED) meets at intervals of five to eight weeks, in which they announce their latest decisions.
A rate hike tends to boost the local currency, as it is understood as a sign of a healthy inflation. A rate cut, on the other hand, is seen as a sign of economic and inflationary woes and, therefore, tends to weaken the local currency.
If rates remain unchanged, attention and also main news and analysis turn to the tone of the FOMC (Federal Open Market Committee) statement, and whether the tone is hawkish, or dovish over future developments of inflation.
How to trade the event?
- Do not rely on the Fed to determine the direction of the dollar in the coming months.
- The dollar tends to follow its predominant trend when the Fed starts to hike rates.
- There is no direct link between the Fed hiking rates and the usd falling. When a weak usd has coincided with a Fed hiking cycle, it has been falling for some time.
- Due to this, we may see a muted reaction to a potential Fed rate hike.
FED educational resources
What is the Fed?
The Federal Reserve System (Fed) is the central banking system of the United States and it has two main targets or reasons to be: one is to keep unemployment rate to their lowest possible levels and the other one, to keep inflation around 2%. The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors, partially presidentially appointed Federal Open Market Committee (FOMC). The FOMC organizes 8 meetings in a year and reviews economic and financial conditions. Also determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. FOMC Minutes are released by the Board of Governors of the Federal Reserve and are a clear guide to the future US interest rate policy.
WHO IS FOMC'S CHAIRMAN?
Jerome Powell took office as chairman of the Board of Governors of the Federal Reserve System in February 2018, for a four-year term ending in February 2022. His term as a member of the Board of Governors will expire January 31, 2028. Born in Washington D.C., he received a bachelor’s degree in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. Powell served as an assistant secretary and as undersecretary of the Treasury under President George H.W. Bush. He also worked as a lawyer and investment banker in New York City. From 1997 through 2005, Powell was a partner at The Carlyle Group.
The World Interest Rates Table
The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.