FOMC Meeting Recap: US Dollar (DXY) Drops as Powell Feeds the Doves

FOMC Meeting Key Points

• The Fed left interest rates unchanged in the 5.00-5.25% range, as expected.
• The US dollar initially fell and indices rose as traders interpreted the meeting and press conference as dovish.

FOMC Interest Rate Decision

As expected, the Federal Reserve’s FOMC left interest rates unchanged in the 5.00-5.25% range.

The decision was unanimous.

FOMC Monetary Policy Statement

After months of minor updates to its statement the Fed gave traders (a little) something to chew on:

• THERE HAS BEEN A LACK OF FURTHER PROGRESS TOWARD THE COMMITTEE’S 2 PERCENT INFLATION OBJECTIVE (new addition)
• RISKS TO ACHIEVING EMPLOYMENT AND INFLATION GOALS 'HAVE MOVED TOWARD BETTER BALANCE OVER THE PAST YEAR' (vs. 'are moving into better balance' in the March policy statement).
• THE FED WILL SLOW THE DECLINE OF BALANCE SHEET BY CUTTING TREASURY REDEMPTION CAP TO $25 BLN PER MONTH FROM $60 BLN STARTING JUNE THE 1^ST (essentially the Fed’s balance sheet will shrink at a slower rate – this was a slight dovish surprise vs. expectations)

In the words of the WSJ’s “Fed Whisperer” Nick Timiraos, the Fed marked to market its policy statement to acknowledge that inflation was still running above the central bank’s official 2% target.

Source: ZeroHedge

Fed Chairman Jerome Powell’s Press Conference

With the caveat that Fed Chairman Powell is still winding down his comments as we go to press, Powell has supported the market’s initial dovish, looking-for-excuses-to-cut-rates interpretation of the Fed’s outlook.

Highlights from the press conference follow (emphasis mine):

FURTHER PROGRESS ON INFLATION NOT ASSURED; PATH UNCERTAIN

INFLATION DATA RECEIVED THIS YEAR HAVE BEEN HIGHER THAN EXPECTED

• FED OFFICIALS ARE 'ACUTELY AWARE' OF HARDSHIPS POSED BY HIGH INFLATION
• GAINING CONFIDENCE TO CUT WILL TAKE LONGER THAN THOUGHT
• IT IS LIKELY THAT GAINING GREATER CONFIDENCE WILL TAKE LONGER THAN PREVIOUSLY EXPECTED.
• SLOWING THE PACE OF QT DOES NOT MEAN OUR BALANCE SHEET WILL SHRINK LESS THAN IT WOULD OTHERWISE.
• I DO THINK POLICY IS RESTRICTIVE AND IS WEIGHING ON DEMAND.
• WE ARE FOCUSED ON HOW LONG TO KEEP POLICY RESTRICTIVE.
• IT IS UNLIKELY NEXT POLICY MOVE WILL BE A HIKE.
• TO HIKE RATES, WE'D HAVE TO SEE EVIDENCE THAT POLICY ISN'T SUFFICIENT TO BRING INFLATION BACK DOWN TO OUR GOAL.
• WE DO NEED TO TAKE A SIGNAL FROM THREE WORSE-THAN-EXPECTED INFLATION READINGS.
• MY EXPECTATION IS WE WILL SEE INFLATION MOVE BACK DOWN THIS YEAR.
• MY CONFIDENCE IN INFLATION MOVING BACK DOWN IS LOWER THAN BEFORE.
• WE ARE NOT SATISFIED WITH 3% INFLATION.
• RESTRICTIVE MONETARY POLICY NEEDS MORE TIME TO DO ITS JOB.
• I DON'T REALLY UNDERSTAND WHERE TALK OF STAGFLATION SCENARIO IS COMING FROM GIVEN US DATA.
• THERE ARE PATHS TO NOT CUTTING, AND PATHS TO CUTTING, IT WILL DEPEND ON THE DATA.
• OTHER COUNTRIES CONSIDERING RATE CUTS ARE NOT EXPERIENCING THE GROWTH THAT THE US HAS.

US Dollar Technical Analysis – US Dollar Index (DXY) Chart

Source: TradingView, StoneX

The US dollar is falling across the board in the initial reaction to the Fed festivities. Risk assets like the S&P 500 are rallying and bond yields are falling (bonds are bid). I’m keeping a close eye on data (NFP Friday) to determine if these risk-on moves continue from here.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX