- GBP/USD surged amid a dovish post-FOMC rate decision market reaction, rallying almost to the 1.3950 mark.
- The Fed help policy setting steady, but its dot-plot appears to have been less hawkish than feared.
- Fed Chair Powell is currently speaking but has largely stuck to his usual dovish script.
Since surging back above the 1.3900 level and back to fresh highs of the day just shy of the 1.3950 mark in wake of a dovish reaction to the release of the latest FOMC monetary policy decision, updated dot-plots and new economic projections, GBP/USD has steadied, and traders are watching Fed Chair Jerome Powell speak.
Prior to the release of the Fed’s monetary policy decision, the pair had been trading around the 1.3850 mark, down about 0.3% on the day at the time. After the latest 100 pip jump the pair is now trading about 0.4% higher on the day, a decent rebound, but in terms of on the G10 rankings, sterling still lags NZD, AUD and the euro, all of which are closer to 0.7% higher on the day versus the buck.
Looking ahead, whilst Powell’s comments are the most immediate concern, as soon as they are over focus will shift to the Bank of England, who release their own monetary policy decision on Thursday alongside updated economic projections.
FOMC Recap
As expected, the FOMC decided to leave the Federal Funds target range unchanged at 0.0-0.25%, the Interest On Excess Reserves (IOER) rate at 0.1%, its rate of monthly asset purchases at $120B. Meanwhile, the Fed continues to forecast no rate hikes through 2023 via its dot plot – markets seem to have expected the Fed’s dot plot to forecast a hike in 2023, hence the dovish market reaction. Note that the new dot plot is a little more hawkish that the last edition, however, with seven FOMC members forecasting lift off in 2023 (previously five) and four in 2022 (previously one).
In terms of the monetary policy statement, not that much was changed apart some language about the pace of the recovery (which was tweaked to show the recovery has accelerated) and the removal of a line about oil prices weighing on inflation. The first tweak is of course a reflection of the economic boost from more fiscal stimulus and the latter tweak is a reflection of the fact that oil prices have recovered sharply in the last few months. The Fed maintained it guidance that there will be no interest rate hikes until it has achieved its dual mandate (full employment and inflation moderately and sustainably above 2.0%) and that the pace of QE purchases will not be slowed until significant progress is made towards this mandate.
Finally, the Fed’s new economic projections for 2021 were very bullish; the bank now expects the US economy to grow at a pace of 6.5% in 2021 (previous forecast was for a growth rate of 4.2%), at 3.3% in 2022 and at 2.2% in 2023. Meanwhile, the Fed now sees Core PCE inflation rising to 2.4% in 2021 before moderating back towards 2.0% in 2022 and 2023 and the unemployment rate dropping back to 4.5% by the end of 2021 before falling back to pre-pandemic levels around 3.5% in 2023. Notably on inflation; the majority of Fed members now see inflation risks as tilted to the upside rather than the downside.
So all in all, the Fed was much more optimistic on the outlook for the US economic recovery in the coming years, making sizeable upgrades to its economic projections tweaking the language in the statement to reflect this. A hawkish minority of Fed members clearly see the better outlook as reason to tighten policy earlier than in current guidance, and these calls for earlier tightening appear to be growing louder as shown by the more hawkish dot plot. But its seems as though markets were fearing something even more hawkish than what the Fed actually delivered, hence the dovish reaction.
Powell’s comments so far
In the press conference, Fed Chair Jerome Powell has largely stuck to his usual dovish script. The main message continues to be that the Fed wants to see actual progress towards its goals (i.e. significant improvements in the economic data) before it starts tapering its QE programme and then actual evidence that these goals have been met before it eventually starts hiking rates – in other words, a Fed that is reactive to the data (some would argue behind the curve) rather than pre-emptive as has been the case in the past.
A major theme when the press have been able to question Powell in recent months has been the banks QE programme; as usual, Powell has refused to being drawn into talking about when the Fed might taper its asset purchase programme and also on possible tweaks to the asset purchase programme. Powell has stuck to his usual line of the current policy being appropriate. Finally, asked about SLR extension, Powell said that there will be an announcement in the coming days.
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