The US Federal Reserve unexpectedly left interest rates unchanged, bolstering the US dollar and forcing a near-instant sell-off in the US Dow Jones Industrials Average. Yet the Fed statement reveals that the Federal Open Market Committee took a subtle dovish shift through the meeting--emphasizing that risks to economic growth and the danger of high inflation were roughly equal priorities. Such rhetoric arguably paves the way for future rate cuts from the US federal reserve, but markets are seemingly scaling back forecasts for the future of monetary policy easing from the US central bank.
According to Credit Suisse interest rate swaps, markets currently predict that the FOMC will leave rates approximately unchanged in the coming 12 months. Just earlier today, they were pricing in at least 25 basis points in rate cuts, and the shift can only be seen as a US dollar positive. Yet whether this sticks is clearly the key question for the dollar, as said interest rate forecasts have been tremendously volatile through recent trading.
Below are the changes in the FOMC text following today's rate decision. Additions are highlighted in green, while subtractions are struck through and highlighted in yellow.
Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and elevated energy prices some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.