USD could recover if markets understand what removing “accommodative” means

  • The Fed raised rates and left the dot-plot unchanged. 
  • The removal of the “accommodative policy” wording hit the US Dollar.
  • This is not necessarily dovish as it seems.

The Federal Reserve raised interest rates as expected. They also maintained the dot-plot as is, thus indicating another increase in December, concluding 2018 with four hikes. The projection for 2019 was left unchanged at three hikes. GDP forecasts were upgraded for 2018 and 2019 but left unchanged for 2020.

The US Dollar dropped on the removal of the wording “accommodative policy” from the statement. If the policy is no longer loose, the thinking was that the Fed is nearing the end of the cycle.

However, there is another way to interpret it. The policy may now move from accommodative to tight. A tight policy means that interest rates exceed the level of inflation.

It is important to remember that the Fed is still on course to add 1% to rates until the end of 2019.

Senior FXStreet Analyst Joseph Trevisani comments:

Removing the statement about monetary policy remaining accommodative supporting a return to 2 percent inflation just reflects reality…inflation is at 2 percent..

If this notion will gain traction, will the US Dollar end this session as a victor? 

Background

The Federal Reserve was unanimously expected to raise the Federal Funds Rate in its September meeting. The decision was communicated well in advance. Also, there was little doubt that the central bank would maintain its indication that it would make another rate increase in December, concluding four hikes in 2018.

The bigger question was about the future: the dot-plot for 2019, 2020, 2021, and the long-term. The wording on inflation is also of high importance after the recent slide in Core CPI to 2.2%. The Fed was not expected to mention the trade tariffs in the statement


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