In yesterday’s FOMC Statement Preview report, we noted that we weren’t anticipating any earth-shattering revelations but that traders could still see some volatility depending on how the central bank characterized the Q1 slowdown and any comments about the future trajectory of interest rates. As we suspected, this month’s changes were more tweaks than anything, but at the margin the Fed was more hawkish than the market was expecting.
Key Headlines from Today’s FOMC Statement (emphasis mine):
- Winter slowdown partly reflects 'transitory factors'
- FOMC still sees inflation rising toward 2% in medium term
- No mention of the strength in the US dollar
- No comments about the likelihood of a June rate hike (hawkish)
- Risks to outlook seen as “nearly balanced”
- Job market could continue to improve “with appropriate policy accommodation.”
- The pace of job gains moderated
- Measures of labor market slack were little changed
As astute readers will note, there’s not too much in the way of novel headlines to mull over in today’s statement. In fact, today’s Fed Statement is more notable for what the central bank didn’t say than for what it did: based on the statement, there were no signs of panic over the Q1 slowdown, nor was there any mention of the negative impact of the recent strength in the dollar. Therefore, it appears that the central bank still intends to raise interest rates in the coming months, though we remain of the view that a June rate hike is a long shot.
As ever, the market reaction can be more revealing than the opaque comments of the central bank itself because it reveals what traders were expecting. In this case, it looks like this morning’s surge in the US dollar may have gotten a bit ahead of itself, with EURUSD down nearly 100 pips from its pre-FOMC levels to trade back near the 1.1100 level, though the bias on the pair is still higher as long as it holds above previous-resistance-turned-support in the 1.1000-1.1050 zone. Meanwhile, US stocks moderated their losses, with the S&P 500 now off just 5 points to 2110 after dipping below 2100 earlier. US 10-year bond yields are essentially unchanged at 2.05%.