On Wednesday, March 15, the U.S. Federal Reserve decided to raise the benchmark interest rate to 1.00% or by 25 basis points, with 9 votes in favor and 1 against. The dissenting vote came from Minneapolis Fed President Neel Kashkari, who proposed keeping interest rates at the previous level.
Three Rate Hikes, Not Four, Drove the Dollar Down
The statement that monetary policy would depend on incoming data was retained. For 2017, the central bank still expects three rate hikes. A slight negative reaction came from the fact that it is not four, as some market participants had expected.
Median Rate Projections:
- 2017: 1.4% (unchanged);
- 2018: 2.1% (unchanged);
- 2019: 3.0% (up from 2.9% in December);
- Long-term: 3.0% (unchanged).
GDP Growth Projections for the U.S.:
- 2017: 2.1% (unchanged from December);
- 2018: 2.1% (unchanged from December);
- 2019: 1.9% (unchanged);
- Long-term: 1.8% (unchanged).
Inflation Projections (PCE):
- 2017: 1.9% (unchanged);
- 2018: 2.0% (unchanged);
- 2019: 2.0% (unchanged);
- Long-term: 2.0% (unchanged).
Core Inflation Projections (Core PCE):
- 2017: 1.9% (up from 1.8% in December);
- 2018: 2.0% (unchanged);
- 2019: 2.0% (unchanged).
Unemployment Rate Projections:
- 2017: 4.5% (unchanged);
- 2018: 4.5% (unchanged);
- 2019: 4.5% (unchanged);
- Long-term: 4.7% (down from 4.8% in December).
In the accompanying statement, the regulator mentioned the recovery of investment in fixed capital. For several months, the Fed has been concerned about the weakness of this indicator. It also noted the continued moderate growth in household spending and employment. Additionally, it mentioned that there have been no significant changes in unemployment data over recent months.
Speech by Janet Yellen
Chair Janet Yellen stated that the decision to raise interest rates was due to increased economic activity. Companies are optimistic, the economy is growing at a moderate pace, and the stability of the labor force participation rate indicates improving labor market conditions, which will continue.
The rise in inflation over the past few months has been driven by higher energy prices. However, core inflation is moving at a slower pace. It is expected that core inflation will reach 2% within the next two years.
[info_block align=”right” linkText=”4 Rate Hikes?” linkUrl=”https://fortraders.org/fundamental/kurs-dollara-prognoz/kakie-eshhe-4-povysheniya-stavki-frs-v-2017-godu.html” imageUrl=”https://files.fortraders.org/uploads/2017/01/dollar-forecast-730×472.jpg”]How many more 4 rate hikes by the FRS in 2017?[/info_block]
Yellen noted that delaying rate hikes could lead to the need for faster increases in the future, which would be negative for the economy.
Regarding tax and budget measures of the new U.S. administration, Yellen maintained her previous rhetoric: nothing is defined, but it remains one of the factors influencing economic prospects.
Important note: The FOMC discussed changes to the reinvestment program but did not make decisions. This means that the regulator will provide more detailed information about changes in the reinvestment program in the near future. This move represents a step toward reducing the Fed’s balance sheet and further tightening monetary policy, which will be carried out during the final stage of monetary policy normalization (when interest rates have reached a normal level).
The head of the regulator noted the possibility of returning to asset purchases in case of an economic downturn. The Fed does not want to use these measures in standard economic conditions.
Why Did the Dollar Fall?
There are several reasons for the market’s reaction:
- Three rate hikes in 2017. The market had already priced this in. Investors were expecting hints of four rate hikes.
- The Fed’s projections have almost not changed. This means there is no reason for a more hawkish monetary policy than what is currently reflected in market expectations. Even if the Fed had announced the same three rate hikes in 2017 but significantly strengthened its forecasts, the drop in the dollar would have been less significant or non-existent.
- The Fed overemphasized comments on tightening monetary policy. The regulator sent hawkish signals to the market since the end of February. In reality, the Fed’s expectations remained December levels, and the praise for the U.S. economy did not translate into ‘numbers.’
It is quite natural that the U.S. dollar fell. The EUR/USD pair rose by nearly 1% after the Fed meeting, according to experts from ForTraders.org.
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“excerpt”: “The markets reacted negatively to the FOMC meeting, causing the dollar to drop. Here’s why.”,
“slug”: “why-did-the-markets-disappoint-after-fomc
FAQ
Why did the markets react negatively to the FOMC meeting?
The markets expected more rate hikes than the Fed announced, leading to a drop in the dollar.
How many rate hikes did the Fed project for 2017?
The Fed still expects three rate hikes in 2017, which was less than some market participants had anticipated.
What factors influenced the dollar’s decline after the meeting?
The Fed’s unchanged projections and lack of stronger signals for tighter policy led to a negative market reaction.
