The much awaited monetary policy meeting of the US Federal Reserve summed up with extended uncertainty on Wednesday and provided considerable US Dollar declines. However, the greenback travelled again on the success path during early Thursday as removal of the word “Patience”, from the FOMC statement, pinched market players for expecting a rate hike in June meeting.
The FOMC statement, said that "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term." The statement in itself is unclear as even if dropping the word “Patient”, and setting the table for a rate increase sooner, the Fed left the timing of an interest rate hike fairly wide open by sighting room for the labor market improvement.
The Fed Chair, Janet Yellen, in her press conference following the meeting, said that "Just because we removed the word 'patient' does not mean we will become impatient," The comment spread the doves into the market and triggered USD sell-off. The Fed Chair also signaled that labor market is still into its nascent stage and needs sustainable improvements to force the policy makers towards an interest rate hike. Moreover, the FOMC officials revised down their forecast for the economic growth to 2.3% and 2.7% during this year and the next as compared to expecting a 3% GDP growth rate during December meeting. Policy makers also cut down their forecast for end-2015 Fed Funds Rate to 0.625% against the 1.125% level forecasted in December and provided additional weakness to the US currency.
Hence, yesterday’s FOMC meeting added uncertainty into the market that initially expected the hint for June rate hike. The meeting also increased importance for all the up-coming FOMC meetings as market players could keep on looking for interest rate hike.
Limits of the FOMC
Let’s discuss the details that could have stopped the FOMC from announcing interest rate hike mistakes made in 1937 when it tightened too early and had to reverse that decision soon after
US Wage Growth & Inflation
Aforementioned chart clearly depicts the two important reasons that could have restricted the FOMC from announcing timings for interest rate hike, the Wage Growth and the Inflation. It shows that even if the NFP & the Unemployment Rate are fairly high, the real wage growth is minimal. Moreover, the inflation is also taking a southward trip and spreading worries for the economy.
Should the FOMC hike interest rate soon, before the wage growth becomes sustained and the inflation rallies, chances are higher that the wages and salaries could dive and would harm the weaker purchasing power of the population. That in-turn would spread another round of pessimistic economic details and would force the central banker to restore monetary easing.
To sum up, even if the broader labor market details are optimistic, and there is a drop of “Patience” word from the FOMC statement, chances are higher that the Fed will wait for further improvements into the labor market details and inflation readings to signal interest rate hike. The announcement is purely data driven and is less likely to happen in near future (till June) unless miracles happen with the US economics.
Other than the speculations concerning Fed’s interest rate hike, discussions between the Eurogroup financial leaders and the Greece, to release emergency lending and loose some of the reform norms, are likely to continue fueling forex market volatility. Should the Greece maintain its hard stance, avoiding orders from Germany and the Troika, chances of Greece leaving the Euro-zone becomes brighter and could hurt the broadly weaker Euro.
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