US Dollar Index recovers footing after Fed Chair Powell cautions against over-dovishness
- After nine months of waiting, the Fed has finally delivered markets a much-desired interest rate cut.
- The Dollar Index hit a 43-month low after the Fed trimmed rates by 25 basis points, with eyes on more rate moves.
- Fed Chair Powell warns that future rate cuts aren't guaranteed, sending the US Dollar back up.
The Federal Reserve (Fed) announced a gentle quarter-point interest rate cut, something many market watchers had anticipated. This marks the Fed's first rate cut in nine months, and now investors are eager to see how many more rate cuts might happen through the end of the year.
The Fed's Summary of Economic Projections (SEP) also indicated that Fed policymakers foresee more rate adjustments in the near future. The dot plot suggests that most policymakers anticipate interest rates will reach about 3.5-3.75% by the end of the year, with the possibility of two more rate cuts through December.
The US Dollar Index (DXY) has hit its lowest valuations in almost four years post-Fed, with the US Dollar (USD) basket tumbling into the 96.30 region for the first time since February of 2022. However, a cautionary appearance from Fed Chair Jerome Powell bolstered the US Dollar back into the high end after he reminded markets that Fed rate cuts aren't on a predetermined path, and can only continue if the economic data supports it.
Read more Powell comments: No widespread support for 50 bps cut
DXY 5-minute chart
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
Joshua Gibson
FXStreet
Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.
