FOMC meeting: the aftermath

FOMC meeting: the aftermath

What happened?

The Federal Reserve had the meeting on Wednesday as planned and announced the steady interest rate in the 1.5%-1.75% range. That was expected by the market so it was not much of the news. More importantly, the Fed Chair Mr. Powell gave a press conference that contained signals on the future outlook.

Fed Reserve rates.png

Will the rates go down in 2020?

The main message of Mr. Powell was that “the current stance of monetary policy is appropriate”. The rate is likely to stay unchanged through 2020 as the economy is in a “good place”, as previously noted.

Also, Mr. Powell indicated a possible cut in 2020 as he intends to reach the inflation rate of 2% which is still missed. According to his own words, they “need some upward pressure on inflation”.

Therefore, we have a steady monetary stance of the Fed with a slight inclination to the dovish side. It has to be noted, however, that to some the three rate cuts this year would signal the end of the dovish cycle, opening the door for a new hawkish policy line on the horizon.

At the same time, the “dot plot” provided by the Fed created some misunderstanding in the background. That may have been a consequence of certain inadequacy of how the table represents the Fed’s intentions. For example, the September plot gives an impression of hawkish expectations for 2020, while the latest release clearly shows no such thing. The lesson: the “dot plot” needs to be read in the dynamics against the previous releases and also within the context of the most recent information from the Fed.

The impact on the USD?

In the long-term, the USD will gradually lose value if the Fed inclines to the dovish line of monetary policy and eventually cuts the rate. Otherwise, it will be supported as long as the rate is steady and the American economy is resilient. But that is only one factor out of many affecting the course of the currency, with US-China relations being at the front line. December 15 with Donald Trump’s decision on trade tariffs will give us another clue of what’s going to happen to USD - stay updated.

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