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Today's Post FOMC Outlook
The initial decline in the dollar and bond yields has been completely reversed after Powell made it clear, in no uncertain terms, that it was too early for markets to think about a pause in rate hikes. Given this assessment, it is clear that the central bank will not pivot to a rate-cutting regime anytime soon.
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US Dollar Market Reaction
Immediately following the FOMC announcement, the US dollar moved sharply lower, with the DXY down nearly 1%, dragged down by a sharp pullback in Treasury yields. This negative reaction, however, was somewhat reversed during Powell’s press conference, after the chairman indicated that the central bank still had “some way to go” in tightening and that the ultimate goal for interest rates may be higher than expected.
The Federal Reserve ended its November meeting by agreeing to another tightening move in its effort to tame sky-high inflation that is running at its fastest pace in 40 years. At the end of its two-day meeting on Wednesday, the FOMC voted to raise borrowing costs by 75 basis points to 3.75%-4.00%, in line with expectations, marking the sixth straight adjustment and the fourth straight three-quarters of a percentage point increase this cycle. Today’s move brings the FOMC’s target rate to its highest and tightest level since early 2008, a sign that the central bank is not giving up its efforts to restore price stability. The decision was unanimous, suggesting policymakers remain in broad agreement on the need for a strong policy response to address rising inflationary pressures in the economy.
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FOMC Statement Highlights
The November statement provided few new clues on the economy, reiterating previous comments that recent indicators point to modest growth in spending and output. Elsewhere, the committee’s characterization of the labor market continued to be broadly positive, emphasizing that job gains were strong and the unemployment rate was low. On the consumer price front, the assessment was unchanged, with policymakers reiterating that inflation remains elevated and that they are closely monitoring the risks. In terms of future action, the institution maintained language suggesting that “sustained increases in the target range would be appropriate,” but added that the bank would take into account the cumulative effects of tightening in setting policy. The change in forward guidance suggests that the Federal Reserve may be considering slowing the pace of hikes to give it more time to assess how its restrictive stance is playing out in the real economy (given its lag) and to better respond to incoming data amid rapidly cooling activity. Powell could, however, clear up any doubts about the bank’s next move during his press conference, but so far there is no reason to believe that today’s change in posture will fundamentally alter the bullish outlook for the US dollar. Today’s FOMC news will have a major bearing on the economic data ahead. In addition to today's FOMC news, there are other analyses that affect data such as Fed data, PMI, and other data that you can continue to update through the GIC Journal. Don't forget to follow the GIC Prize Festivities with a total prize of 1 billion without a draw and get the prize!
