FOMC Decision: Fed firmly on pause, as dollar recovers but gold continues to surge

The Federal Reserve kept monetary policy unchanged at its meeting today, which was widely expected. The accompanying statement had some interesting changes compared to December, and these are helping the dollar to recover.

The key points from the Fed statement include:

• The Fed sees growth as solid.
• Although job gains are low, the unemployment rate has ‘stabilized’.
• The statement removed December’s line that downside risks to employment have grown.
• The Fed sees inflation as ‘somewhat elevated’.
• The Fed remains in data-watch mode and will monitor the evolving outlook in the future.

Fed has maximum flexibility for future policy decisions

As you can see, the Fed has maintained maximum flexibility around the future of economic policy and did not give anything away about what its next move will be. However, the strengthening economic conditions clearly do not warrant further rate cuts in most Fed members’ eyes. Thus, if US economic data continues on its current trajectory then we could be on pause for some time.

Majority of FOMC members resist White House pressure to cut rates, but future remains bleak

Although the Fed voted overwhelmingly in favour of remaining on hold, there were still two dissenters: Stephan Miran and Christopher Waller. Miran is a noted dove, and Waller is apparently on the short list of Donald Trump’s picks for the next Fed chair. Thus, Waller’s decision to cut rates will be seen as a political choice.

Considering the vote was 10-2 in favour of remaining on hold, the market may not take too much notice of Waller and Miran, however, we think that this highlights a major risk for the Fed in the coming months. Whoever Trump picks as the next Fed chair is likely to be dovish, and may be swayed by Presidential pressure, and this is not good for the future of Fed independence.

If the Fed‘s independence is at stake in the coming months, then expect an extension of the dollar debasement trade, and selling pressure in the US Treasury market.             However, in the short term, dollar selling is taking a breather, and the buck could recover from here.

The immediate market reaction to the Fed decision includes:

• A stronger dollar, which is now leading the G10 FX pack after sharp falls earlier this week. A Fed that is shifting to a neutral position is dollar positive. Added to this, the fact that most Fed members avoided Trump’s pressure to lower interest rates suggests that the Fed remains independent. The dollar index is back above 96.50, and a move back to 97.00 could be on the cards. The market may be reluctant to push the dollar too high after recent volatility, so the recovery could be short-lived.
• Slightly reduced rate cut expectations by year end, US rates are now expected to end the year at 3.18%. There are still just under 2 cuts priced in by year end.
• US Treasury yields are mildly higher across the curve.
• US indices are at the lows of the day; however, losses are minimal so far, and they come after the index reached a record high earlier today above 7,000.
• The Fed’s decision  to keep rates on hold has not thwarted the rally in the gold price, which is testing $5,300 per ounce. The Fed’s assertion of independence has not dented demand for gold, which suggests that 1, momentum in the yellow metal is strong and 2, that flows into gold are connected to long term structural weakness in the dollar rather than Fed policy.

Overall, we see the market reaction from this decision as being limited. The options market was not pricing in big moves in the major markets on the back of this meeting, and instead, the bigger driver for US stocks could come from the earnings reports that are due later this evening.

Powell won’t be pushed around  by Trump, which sparks short term dollar recovery

As Powell speaks, he has reiterated that the Fed’s current policy stance is ‘within the range of neutral’, this is not a Fed chair that will be pushed around by the Trump administration, and this is good news for the dollar in the short term.

The material on this page does not constitute financial advice and does not take into account your level of understanding, investment objectives, financial situation or any other specific needs. All information provided, including opinions, market research, mathematical results and technical analyzes published on the Website or transmitted To you by other means, it is provided for information purposes only and should in no way be construed as an offer or solicitation for a transaction in any financial instrument, nor should the information provided be construed as advice of a legal or financial nature on which any investment decisions you make should be based exclusively To your level of understanding, investment objectives, financial situation, or other specific needs, any decision to act on the information published on the Website or sent to you by other means is entirely at your own risk if you In doubt or unsure about your understanding of a particular product, instrument, service or transaction, you should seek professional or legal advice before trading. Investing in CFDs carries a high level of risk, as they are leveraged products and have small movements Often the market can result in much larger movements in the value of your investment, and this can work against you or in your favor. Please ensure you fully understand the risks involved, taking into account investments objectives and level of experience, before trading and, if necessary, seek independent advice.

Register a Revolut Business Account