On February 1st the FOMC held it's Monetary policy meeting and in this article we take a look at the key takeaways from the event.
The Committee once again emphasised that its focus is on achieving its dual mandate of maximum employment and 2% inflation over the long term. To support these goals, they have raised the target range for the federal funds rate from 4.5% to 4.75% percent, with the expectation that ongoing increases will be necessary to return inflation to 2%.
The Committee is also continuing to reduce its holdings of Treasury securities and agency debt, and mortgage-backed securities, as per its previously announced plans.
In determining the appropriate stance of monetary policy, the Committee will take into account a wide range of information, including labor market conditions, inflation pressures and expectations, financial developments, and international developments. The release of the NFP (Non-farm Payroll) figures on February 3rd revealed a surprise beat of the consensus by a wide margin, with added payrolls coming in at 517K compared to the 185K consensus. Increasing payrolls continues to add pressure on the FOMC to tame inflation, with demand for salaries increasing and the supply of workers continuing to fall. While there are hopes that the pace of rate hikes will soon begin to slow after recent CPI numbers pointed to a deceleration in the rate of inflation, the NFP release came as a sobering reminder that inflation is here to stay for the foreseeable future. The FOMC will also continue consider the cumulative impact of monetary policy, the lags in its effects on the economy and inflation, and other relevant factors as per its other recent monetary policy statements.
If risks emerge that could impede the attainment of the Committee's goals, they are prepared to adjust the monetary policy stance as necessary. The Committee will continue to monitor incoming information and assess its implications for the economic outlook and will look to tighten it's approach to monetary policy if such risks arise.
Jerome Powell, the Chair of the US Federal Reserve, made a statement reiterating the Fed's commitment to achieving its 2% inflation target. He acknowledged the recent strength in job gains and low unemployment rate. However, he made a surprising announcement, stating that the deflationary process has begun. This announcement, however, remained overshadowed by the NFP release which was reflected in the dollar this week.
The dollar initially reacted negatively from the FOMC meeting with the US Dollar Index falling around 1% throughout the day, as trading started around 101.7 and reached lows of 100.6 following the Comitte's meeting; at first impressions the dollar perhaps hinted at a more dovish road ahead, however this bearish move was quickly turned around with the release of the Nonfarm Payrolls (NFP), released on February 3rd, which sent the US Dollar Index soaring to highs of 102.6, a level not seen since mid-January.
With regards to the appropriate level of monetary policy tightening and the FOMC's road ahead, Powell indicated that several more interest rate hikes may be necessary to reach it. He also mentioned that there may be a possibility of rate cuts this year, however, if inflation decreases significantly faster than expected. In summary, there is light at the end of the tunnel for the current inflation crisis with the Federal Bank hinting at potentially loosening monetary policy by the end of the year. It was reiterated, however, that inflation is still very much an issue for the US and the rest of the world. After climbing over 20% in 2022 following the Federal Bank's rate hikes and inflation spurred by conflict in Ukraine, among other factors, could we finally see the US Dollar Index return to the 2021 levels of $100 and below?
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