FOMC meeting recap: Dollar dives on “dovish hike”

FOMC Meeting takeaways

• The Fed raised interest rates by 25bps to the 4.75%-5.00% range as expected
• The central bank left its quantitative tightening program unchanged and projected interest rates to sit near 5.1% at the end of the year.
• Fed Chairman Powell suggested that the recent banking stress could serve as a pseudo “rate hike” opening the door for an end of the rate hiking cycle.

FOMC meeting decision

The Federal Reserve’s FOMC opted to raise interest rates by 25bps (0.25%) to the 4.75%-5.00% range. As we noted in our FOMC meeting preview report, the market had heavily priced in this outcome, so confirmation of the expected decision on interest rates didn’t move markets much by itself.

FOMC monetary policy statement

In addition to the increase in interest rates, there were a couple of other notable changes to the Fed’s monetary policy statement:

Source: Federal Reserve

While the Fed did mention that recent stress in the banking sector could “weigh on growth,” the central bank did not reduce the pace of its balance sheet reduction (QT) program to support regional banks.

However, Jerome Powell and Company did remove a reference to “ongoing increases” (plural) in its Fed Funds rate, replacing it with a vague comment that “some additional policy firming may be appropriate.” In other words, the Fed has toned down its statement to give it flexibility to pause the interest rate hiking cycle in May depending on incoming economic data.

FOMC Summary of Economic Projections (SEP)

There were few wholesale changes in the Fed’s economic projections, but at the margin, the tweaks pointed to incrementally higher/stickier inflation and lower growth, especially in 2024:

Source: Federal Reserve

Crucially, the median FOMC member did not change his/her expectations for end-2023 interest rates from 5.1%, suggesting roughly one more rate hike over the next nine months. Though they’re not as pessimistic as markets, Fed policymakers are still projecting a median of three 25bps rate hikes next year, suggesting that the rate hiking cycle is near, if not already at, its end.

Source: Federal Reserve

Fed Chairman Powell’s press conference

Chairman Powell is still winding down his press conference as we go to press, but with most of the pontificating behind us, Powell has repeatedly emphasized that the impact of the stresses in the banking system will tighten credit and may serve as a pseudo “rate hike” in terms of its impact on the economy.

Highlights from the press conference follow [emphasis mine]:

• ISOLATED BANKING PROBLEMS IF LEFT UNADDRESSED CAN THREATEN THE BANKING SYSTEM, THAT'S WHY WE TOOK DECISIVE ACTION
• OUR LENDING PROGRAMS ARE EFFECTIVELY MEETING BANKS NEEDS
• INFLATION REMAINS TOO HIGH AND THE LABOR MARKET IS STILL TOO TIGHT
• POLICYMAKERS GENERALLY EXPECT SUBDUED GROWTH TO CONTINUE
• WAGE GROWTH HAS SHOWN SOME SIGNS OF EASING
• INFLATION HAS MODERATED SOMEWHAT BUT STRENGTH OF RECENT READINGS INDICATE INFLATION PRESSURES CONTINUE TO RUN HIGH
• PROCESS OF GETTING INFLATION BACK DOWN HAS A LONG WAY TO GO; IT WILL BE BUMPY
• LONGER-TERM INFLATION EXPECTATIONS REMAIN WELL ANCHORED
• WE ARE CONTINUING PROCESS OF SIGNIFICANTLY REDUCING OUR BALANCE SHEET
• OUR PROJECTIONS ARE NOT A PLAN, THE PATH WILL ADJUST AS APPROPRIATE
• WE WILL MAKE MEETING- BY-MEETING DECISIONS BASED ON TOTALITY OF DATA
• INTERMEETING DATA ON JOBS AND INFLATION CAME IN STRONGER THAN EXPECTED.
• THE LAST TWO WEEKS WILL CAUSE A WEIGHT ON DEMAND AND INFLATION
• IN PRINCIPLE CAN THINK OF BANKING STRAIN AS EQUIVALENT TO A RATE HIKE
• THE POSSIBLE TIGHTENING IN CREDIT CONDITIONS MAY MEAN MONETARY TIGHTENING HAS LESS WORK TO DO
• GOODS INFLATION IS COMING DOWN EVEN IF MORE SLOWLY THAN WE WOULD LIKE, WE STILL DON'T HAVE A SIGN OF PROGRESS ON THE SERVICES EX-HOUSING SECTOR.
• RATE CUTS THIS YEAR ARE NOT IN OUR BASELINE EXPECTATION.

US dollar technical analysis – Dollar Index at 7-week lows

The initial reaction to the Fed’s statement and economic projections reflected a so-called “dovish hike” with the US dollar falling against most of her major rivals, short-term Treasury yields falling, gold gaining ground, and major indices rallying. Those reactions only extended early in Chairman Powell’s press conference, with the US dollar falling to 7-week lows, the Nasdaq 100 rallying to 7-month highs near 13,000, and gold erasing all of yesterday’s losses to trade back around $1980.

As we go to press, indices and gold have reversed their early gains, potentially on comments from Treasury Secretary Yellen that a broader increase in bank deposit insurance is not under consideration, but the greenback's losses are holding in there. Look for Fed officials to clarify any misinterpreted comments in the coming days before the focus shifts back to economic data.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter @MWellerFX