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US Dollar Under Pressure Despite a Relatively Hawkish FOMC Meeting

June 13, 2024 - Written by John Cameron


The US dollar dropped sharply on Wednesday and is trading near the April/May lows.

The FOMC meeting was relatively hawkish but was overshadowed by the CPI report which showed slowing inflation.

Only one Fed rate cuts is projected this year and the neutral rate has been revised higher.

It isn’t at all obvious on Wednesday’s charts, but the FOMC meeting was relatively hawkish. Despite this, the S&P500 closed +0.85% higher at new all-time highs, while the US dollar and yields were sharply lower. This is due to the earlier CPI release which surprised markets with a 0% m/m reading. Core CPI was only 0.16%, compared to a 0.3% estimate. The release caused significant moves in all related markets as this was the first really encouraging inflation report this year and should open the door for Fed cuts later in the summer.

The CPI report therefore overshadowed the relatively hawkish FOMC meeting which announced no major policy changes but made some adjustments to forecasts which could be important.

FOMC Review

The Fed kept rates steady at 5.25-5.50% as expected in Wednesday’s meeting. However, there were some potentially significant changes to projections which lean hawkish.

The first of these came with a new ‘dot plots’ projection for rate expectations. This was last published in March when the dots projected three cuts in 2024. This was expected to be cut to two cuts for the remainder of the year, but now only projects one. Furthermore, 2025 is expected to end at a rate 25bps higher than it was in March.

The second of these came from a small change to the long run forecast, or what can be called the ‘neutral rate’. This is where policy is expected to be neither restrictive or stimulative in the long run. This was raised from 2.6% to 2.8%.

Lastly, economic forecasts were generally bullish or revised higher. As ING point out,

“...the Fed retained a rather upbeat growth forecast of 2.1% for 4Q YoY GDP whereas the market consensus is 1.7% and left their unemployment rate forecast unchanged at 4% despite last Friday’s jobs report telling us we are already there. The core PCE deflator is now projected to end the year at 2.8% versus 2.6% previously. “

The higher revision to the PCE deflator does mean the Fed expect inflation to remain sticky and explains why some of the rate projections are more hawkish. However, the statement was constructed some time ahead of the CPI release which came out the same day as the meeting. Some of the data in the CPI report suggests inflation could come down faster than expected.

Despite these slightly more hawkish projections, the tone of the meeting was largely dovish. The statement was tweaked and now says "there has been modest further progress" on inflation instead of "a lack of further progress." Chair Powell’s press conference was also on the dovish side and he underlined the data dependent approach and the Fed’s ability to “adjust” and “respond.”

Ther are several factors which could get the Fed to alter from its projections. The first would be a sudden weakening in the economy, especially a rise in the unemployment rate. As ING note,

“The unemployment rate has gone from 3.4% to 4.0%. If that moves convincingly above 4% with more evidence of a cooling of wages this too will help swing the argument in favour of rate cuts.”

More CPI prints of 0% would also give rate cuts odds a major boost. Core CPI should remain around 0.2% to pave the way smoothly for cuts.

Should both the economy cool and inflation soften, there is still the potential for three cuts this year and this would put some heavy selling pressure on the US dollar which has already performed poorly over the last month.
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