Hesitant FED, Hawkish FOMC Dot Plot Reduces USD CPI Losses

Yesterday the US Dollar dived more than 1 cent lower after softer CPI inflation numbers but reversed losses after the hawkish FED policy. Markets were expecting the FED to be clearer about the start of the rate cut cycle, especially after the soft inflation figures for May, but they hesitated, which supported the USD, sending it higher again.

The FED is holding rates higher for longer despite lower inflation

The increased median Fed funds rate for 2025 signals a continuation of a hawkish monetary policy stance, which will keep borrowing costs high, thus hurt home buyers and new investments. The Fed’s projection suggests that any rate cuts might be delayed further than the market previously expected, potentially dampening enthusiasm for high-growth sectors. However, it was bullish for the USD.

FED Funds Rate:

  • End-2025: Median projection is 4.1%, up from 3.9% prior.
    • Implication: This suggests the Fed expects to keep rates higher for longer, reflecting ongoing concerns about inflation.

FED GDP Growth Projections:

  • 2024: Median growth remains steady at +2.1%.
  • 2025: Median growth remains steady at +2.0%.
    • Implication: The Fed maintains a stable outlook on economic growth, indicating confidence in continued expansion despite higher interest rates.

US Unemployment Rate:

  • 2024: Projected to remain at 4.0%.
  • 2025: Projected to rise slightly to 4.2% (up from 4.1% prior).
    • Implication: A modest increase in the unemployment rate suggests the Fed anticipates some cooling in the labor market as monetary policy remains tight.

US Inflation (PCE and Core PCE):

  • 2024 PCE Inflation: Revised up to 2.6% from 2.4%.
  • 2025 PCE Inflation: Revised up to 2.8% from 2.6%.
    • Implication: The higher inflation projections indicate persistent inflationary pressures, necessitating a more prolonged period of higher interest rates.
  • 2024 Core PCE Inflation: Revised up to 2.8% from 2.6%.
  • 2025 Core PCE Inflation: Revised up to 2.3% from 2.2%.
    • Implication: Core inflation, which excludes food and energy, is also expected to remain elevated, reinforcing the Fed’s stance on maintaining higher rates.

Fed Chair Jerome Powell’s statement which is released with the rate decision, underscored cautious optimism once again, which wasn’t exactly what markets were expecting. While acknowledging that inflation has eased and the economy remains strong, the Fed requires more data to confirm these trends before making significant policy changes. Market participants now expect the Fed to maintain its current stance until greater confidence in sustained low inflation is achieved. So now expectations are for just one rate cut, which sent the USD higher after the crash post CPI release.

Analysis of Fed Chair Jerome Powell’s Opening Statement:

Key Points:

  1. Inflation Trends:
    • Easing but Still High: Inflation has eased substantially but remains above desired levels.
    • Recent Readings: More recent inflation readings have shown modest further progress in easing.
  2. Economic Growth:
    • Solid Pace: Recent indicators suggest the economy is still growing at a solid pace.
    • Consumer Spending: Remains robust, indicating ongoing economic strength.
    • GDP and Private Domestic Final Purchases: GDP growth has slowed, but private domestic final purchases continue to grow at the same pace as the second half of 2023.
  3. Labor Market:
    • Better Balance: The labor market has come into better balance, with strong job data in April and May.
    • Unemployment Rate: Although it has ticked up slightly, the unemployment rate remains low.
    • Labor Market Condition: A broad set of indicators suggests the labor market has returned to pre-pandemic conditions—relatively tight but not overheated.
  4. Future Rate Cuts:
    • Confidence in Inflation: The Fed will need greater confidence in sustained low inflation before cutting rates.
    • More Data Needed: More positive data is needed to bolster confidence that inflation is on a sustainable downward path.

Implications for Markets and Policy:

  1. Inflation and Rate Cuts:
    • Powell’s emphasis on needing more data to confirm inflation’s downward trend suggests the Fed is not yet ready to cut rates.
    • The modest progress in recent inflation numbers indicates some room for optimism but not enough for immediate policy changes.
  2. Economic Growth:
    • Solid economic growth and robust consumer spending support the view that the economy is resilient.
    • Continued growth in private domestic final purchases indicates underlying economic strength despite a slowing GDP.
  3. Labor Market:
    • The balanced yet strong labor market points to a healthy economy that could withstand further rate hikes if necessary.
    • Low unemployment rates and strong job data provide a foundation for continued economic stability.
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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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