The U.S. Dollar Drops After the Fed Meeting and Powell's Speech

Key events:      

• Switzerland  – Interest Rate Decision (Q4)    
• Eurozone – EU Leaders Summit     
• UK – BoE Interest Rate Decision (Dec)    
• Eurozone – ECB Interest Rate Decision (Dec)
• USA – Core Retail Sales (MoM) (Nov)  
• USA – Initial Jobless Claims    
• Eurozone – ECB President Lagarde Speaks  

At the end of Wednesday, the dollar fell in price against most major currencies. The dollar index was falling to 103.44p., having updated the minimum for 6 months. Stocks in the U.S. fell in price following a meeting of the Federal Reserve and a press conference given by Fed Chairman Jerome Powell. However, on Thursday morning the dollar was already trying to strengthen.

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The Fed yesterday increased the interest rate on federal funds rate by 50 basis points, to 4.25-4.5% per year. The decision was unanimous and coincided with the forecasts of most economists and analysts, and the rate level reached the highest since 2007.

Fed Chairman Jerome Powell said in his speech following the meeting that the central bank will stay on course to tighten monetary policy until it achieves its goal of returning inflation to the 2% target. In November, inflation was 7.1%.

The U.S. central bank does not intend to begin cutting rates until it is confident that inflation will slow to its target, Powell said.

The released median forecast by Federal Reserve executives also indicated that members of the Federal Open Market Committee (FOMC) do not expect a rate cut during 2023. The median forecast calls for the rate to reach 5.1% at the end of next year, which means the target range for the federal funds rate will be 5-5.25%.

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Powell's rhetoric and the Fed chiefs' forecast were seen as hawkish signals, and the market reacted with a decline.

The forecast for the final rate level "was significantly higher than the market's expectations implicit in the current quote," said Bill Adams, senior economist at Comerica Bank. He noted that most Fed policymakers believe it is reasonable to raise the rate another 75 bps through 2023 and keep borrowing costs at that level through the end of the year.

However, the market does not believe the Fed. The lack of confidence explains the lack of growth in Treasury yields as the stock market fell on Wednesday. That is why the dollar was also left on the outside yesterday. The fact is that according to the December dot plot, absolutely all Fed officials are predicting that the rate will peak above 5% annually in 2023. Meanwhile, 17 of the 19 Fed officials see a peak rate of at least 5.1%, and 7 officials see a peak rate of at least 5.4%. However, the federal funds rate futures market is still betting that the peak rate in 2023 will not exceed 5%. None of the 9 FOMC members is predicting a rate cut in 2023, the Fed chief stressed at the press conference. However, the market still expects a rate cut of 25 or 50 bps by the end of 2023.

Thus, hopes of a soft landing in the economy, which was presented by the weak consumer inflation report published on Tuesday, are crumbling before our eyes. It is relevant to talk about a hard landing, as the Fed is making it clear that it is willing to pay the price.