US Dollar Index recovers to 99.60 as Powell adopts cautious but balanced tone
- Fed holds rates steady, signals policy patience amid rising inflation and labor risks.
- Powell highlights uncertainty, says rate path still unclear.
- US Dollar Index bounces to 99.60 after dipping post-decision.
US Dollar Index recovers to 99.60 as Powell adopts cautious but balanced tone
The US Dollar Index initially fell to 99.50 after the Federal Reserve left rates unchanged at 4.5%, citing persistent inflation and rising risks to both sides of its dual mandate. The policy statement struck a cautious tone, emphasizing that while the labor market remains solid, uncertainty around the economic outlook has increased. Traders briefly priced in up to three rate cuts for the year, but market conviction softened as the press conference unfolded.
Fed Chair Jerome Powell added nuance to the outlook, stating he "can’t confidently say" what the appropriate rate path is and that the Fed is "not in a situation where we can cut preemptively." He stressed the need for more data and emphasized patience, noting the current policy stance is "modestly restrictive." These balanced comments helped lift the Dollar off its lows, pushing the DXY back up to 99.60 as traders reassessed the likelihood of imminent easing. Markets now look ahead to inflation and labor data for further clarity.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
