On Wednesday, September 20 at 21:00 MSK, following the meeting of the US Federal Reserve, the decision was made to keep the main interest rate at <1.25% by unanimous decision of the FOMC.
From the first minutes, the EUR/USD pair began to fall sharply. According to the text of the accompanying statement and dot plot (interest rate forecast), the probability of a main interest rate increase in December still remains.
Forecasts from the Fed
However, compared to expectations in June, long-term forecasts were revised downward. The Fed still expects a gradual increase in the main interest rate.
- 2017: 1.4% (unchanged);
- 2018: 2.1% (unchanged);
- 2019: 2.7% (against 2.9% in June);
- 2020: 2.9% (not forecasted in June)
- in the long term: 2.8% (against 3.0 in June).
US GDP forecast was improved:
- for 2017: 2.4% (against 2.2% in June);
- for 2018: 2.1% (unchanged);
- for 2019: 2.0% (against 1.9% in June);
- for 2020: 1.8% (not forecasted in June);
- in the long term: 1.8% (unchanged).
Inflation (PCE) forecast worsened only for 2018:
- for 2017: 1.6% (unchanged);
- for 2018: 1.9% (against 2.0 in June);
- for 2019: 2.0% (unchanged);
- for 2020: 2.0% (not forecasted in June);
- in the long term: 2.0% (unchanged).
Core inflation (Core PCE) forecast was revised significantly downward:
- for 2017: 1.5% (against 1.7% in June);
- for 2018: 1.9% (against 2.0% in June);
- for 2019: 2.0% (unchanged);
- for 2020: 2.0% (not forecasted in June).
Unemployment rate forecast was improved for 2018-2019:
- for 2017: 4.3% (unchanged);
- for 2018: 4.1% (against 4.2% in June);
- for 2019: 4.1% (against 4.2% in June);
- for 2020: 4.2% (not forecasted in June);
- in the long term: 4.6% (unchanged).
Short-Term Prospects and Quantitative Tightening
The Fed noted continued strengthening of the labor market, but a decline in inflation. Consumer spending grew at moderate rates, and capital investments showed increased growth in recent quarters.
Economic activity will face pressure in the short term (within 3-4 quarters) due to hurricane actions near the US coast. Inflation will receive temporary support due to rising gasoline prices. Otherwise, risks for the economy are balanced, noted in FOMC.
Quantitative tightening program will start in October. By the end of the year, the Fed will reduce reinvestment by $6 billion in Treasury and $4 billion in mortgage securities monthly. The announced plans will not change.
Key Statements from Yellen
During her speech, Fed Chair Janet Yellen stated that the low inflation in 2017 is likely due to temporary factors. This issue concerns the Fed the most. If temporary factors do not disappear or become prolonged and inflation remains persistently low, the Fed will adjust its plans regarding the monetary policy path.
Yellen also expressed satisfaction with the labor market situation. According to the Fed, there are almost no underutilized capacities. This should help accelerate price growth.
Reaction of the EUR/USD Pair
The EUR/USD pair fell by almost 1.5% following the Fed meeting on September 20. Markets liked the Fed’s optimism regarding the short-term economic outlook and the plans to raise the main interest rate in December. The probability of this event increased on the futures market from 56.6% to 66.5%.
Experts from ForTraders.org note that ongoing inflation issues prevent dollar bulls from achieving more significant success in strengthening the US currency.
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About the EUR/USD Rate
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FAQ
Why did EUR/USD drop after the Fed meeting?
The EUR/USD pair fell by 1.5% due to the Fed’s decision to keep interest rates unchanged and revised downward long-term rate forecasts.
What were the key changes in the Fed’s forecasts?
The Fed lowered long-term interest rate forecasts and revised core inflation projections downward, while improving GDP and unemployment rate forecasts for 2018-2019.
Will the Fed raise interest rates in December?
The Fed’s statement indicated a continued probability of a rate increase in December, with futures markets showing an increased likelihood of this event.
