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FOMC Hikes Rates by 25-bps Meeting Expectations, Sends US Dollar Lower

FOMC Hikes Rates by 25-bps Meeting Expectations, Sends US Dollar Lower

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- FOMC raises benchmark interest rate to range of 0.75-1.00%, as was expected by markets (Fed funds futures were pricing in a 100% chance pre-meeting).

- Fed interest rate glide path remains unchanged from December 2016 (last update); today’s decision can be thus referred to as a ‘dovish hike.’

- US Dollar sinks across the board without new hawkish guidance; USD/JPY slips under 114.00, EUR/USD challenges 1.0700.

The Federal Open Market Committee surprised absolutely no one today when they announced they would hike the main overnight benchmark rate into a range of 0.75-1.00%, as was priced into the market well in advance of today’s policy meeting. After a series of hawkish commentary from Fed officials in late-February and early-March, coupled with another strong US labor market, today’s rate hike was all but guaranteed.

If anything was going to drive the US Dollar higher today, it would have been an upgrade to their expectations for further rate hikes. However, none materialized: like in December, the FOMC still believes that there will be a total of three rate hikes in 2017. For the greenback, three rate hikes were already priced into the market as of this morning.

Commentary from the initial FOMC statement suggests that policymakers are only cautiously optimistic on the US economy. Describing inflation as “close to the goal” of +2% over the medium-term, policymakers cautioned that the target is “symmetric.” The FOMC believes that inflation is expected to stabilize around +2%, and rates will evolve to ensure that there is a “sustained return to +2% inflation.”

Overall, the FOMC saw the median Fed funds rate at 1.4% at the end of 2017, as they did in December; and the median Fed funds rate at 2.1% at the end of 2018, as they did in December as well. In sum, today’s actions can be regarded as a ‘dovish hike,’ as my colleague James Stanley put it: yes, rates moved higher; but no new hawkish guidance was issued.

Here are the Fed’s new forecasts:

FOMC Hikes Rates by 25-bps Meeting Expectations, Sends US Dollar LowerFOMC Hikes Rates by 25-bps Meeting Expectations, Sends US Dollar Lower

Here is the Fed’s new dot plot:

FOMC Hikes Rates by 25-bps Meeting Expectations, Sends US Dollar Lower

See the DailyFX economic calendar for Wednesday, March 15, 2017

Chart 1: DXY Index 1-minute Chart (March 15, 2017 Intraday)

FOMC Hikes Rates by 25-bps Meeting Expectations, Sends US Dollar Lower

Immediately following the data, the US Dollar slipped back versus the Euro and the Japanese Yen, with the Dollar Index (DXY) falling from 101.54 ahead of the FOMC decision to as low as 100.97. DXY Index was trading at 101.02 at the time this report was written.

Fed Chair Janet Yellen begins speak at 14:30 EDT/18:30 GMT; her Q&A should prove equally market moving as the initial statement release. Follow the commentary in the DailyFX Real Time News feed.

Read more: Preview for March FOMC Rate Decision and Impact on US Dollar

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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