Fed Statement leans towards a hawkish tone with subtle but important changes since December’s statement, long USD/JPY?
FOMC has left the stance of policy unchanged with a unanimous vote to leave target rates for Fed fund rate unchanged at 1.25% to 1.5%. The decision was all as expected but what attracted our attention was the statement which contained subtle by important changes.
- The changes in the decision statements as compared to December were subtle but together pointed towards the committee’s confidence in the economic outlook which is described as “roughly” balance. Furthermore, household spending and business fixed investments were described as “solid”.
- The committee also mentioned that inflation on a 12-month basis is expected to “move up this year” rather than “remain somewhat below 2 percent in the near term”.
- Fed’s repeated language saying that “near-term risks to the economic outlook appear roughly balanced” closed the door to two hikes so we should be seeing 3 or more hikes this year.
- Powell will be sworn in as chairman of Board of Governors on 5 February as said by FOMC in a separate statement.
This FOMC statements with market data improving at the same time have given us greater confidence in US economic outlook. Several Fed officials have also called for a restructure of the Central Bank’s policy framework, which could include aiming for higher inflation target.
We might be looking at 3 possible hikes at March, June and September meetings with any more surprises almost welcomed. Lastly, with dollar being oversold for the past 6 weeks, we should expect to see some catalyst coming in as the hike in March will be priced in accordingly.
Fullerton Markets Research Team
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