USD narrowly mixed after the FOMC statement - BBH

The US dollar is narrowly mixed after selling off following the FOMC statement, notes the analysis team at BBH.  

Key Quotes

“Sometimes the narrative explains the price action, and sometimes the price action explains the narrative.  This seems to be the case of the latter.  The dollar and interest rates fell, and so the Fed was dovish.”  

“First, let's turn to the fall interest rates.  At the end of last week, the two-year note yielded 1.34%.  It rose slightly at the start of the week and fell slightly yesterday.  It sits at 1.35% now.  The December Fed funds futures contract finished last week with an implied yield of 1.225%.  It had risen to 1.24% on Tuesday, but finished yesterday at 1.225%.  This shows that expectations for the trajectory of Fed policy have not changed.  The 10-year yield, which has less directly to do with Fed policy, is five basis points higher this week.”

“Second, consider that the dovish read of the consensus narrative was based on the changed characterization of the current situation, not in the forward-looking section.  The FOMC statement said that inflation was "below target" (not "persistently" as some press accounts characterized it) as opposed to the previous statement in June that said, "somewhat below target."  The FOMC did not change its assessment that inflation would move toward its target in the medium term.”

“Third, consider the inflation data that have been released since the mid-June meeting.  The May PCE deflator was released at the end of June.  As was seen with the May CPI, which was released a few hours before the June FOMC meeting concluded, the core PCE deflator eased for the fourth consecutive month.  There was the June CPI in mid-July.  The headline rate eased to 1.6% from 1.9%, but the core rate was unchanged at 1.7%.  This is to say that there has been limited high frequency price data over the past six weeks, which also limits the significance we attach to the word "somewhat" in the economic description.”  

“The bottom line is that the scenario we suggested after the June FOMC meeting remains most likely.  That is for the FOMC to announce in September ("relatively soon") that it will not completely rollover maturing securities but will instead allow some to roll-off.  This will allow it to retire an equivalent amount of excess reserves, and through this allow its balance sheet to shrink.  By doing so in September, it also succeeds in distancing its balance sheet operations from monetary policy.  It also allows the Fed to "closely watch" the evolution of prices (inflation).  The CME calculation puts the odds of a December hike near 47% while the Bloomberg model is a little lower.”