The dollar is bullish against all other major currencies in response to the Fed meeting.
First, the most important result of yesterday’s FOMC meeting: Several FOMC members now expect (in contrast to their projection in March) that they will carry out the first rate hike as early as 2023.
Admittedly, we can’ t be sure that this will really happen. 2½ years is a long time. Even the FOMC is not sure. The “dots” (i.e., the FOMC expectations) for the end of 2023 are so widely scattered that one can really only say: Anything is possible between now and then. What the FOMC members now expect, the market had also expected before yesterday’s FOMC projections. For the end of 2023, the Fed Funds rate priced in by the OIS market is between 0.5% and 0.75%.
The point is just this: now as many FOMC members expect policy rates above 0.75% at the end of 2023 (8 to be exact) as there are FOMC members expecting a rate below 0.5% (7 to be exact). In other words, the market is not systematically misjudging FOMC intentions.
And how could it be otherwise, when a key interest rate is at the effective lower bound: The risk is on the upside. The “dots” are also a reminder of this: After all, 7 FOMC members expect the “liftoff” (i.e. the first rate hike) as early as 2022.
This means that all those who are betting on higher interest rates in the medium term in various markets (here: the USD bulls) are on a much safer side. That doesn’t sound like a mega-strong USD-positive argument, but it was still worth more than a cent in the EUR-USD rate to the FX market last night. I think that’s reasonable.
Of course, I should not forget to mention that we have a different inflation forecast from the FOMC in the medium term. Our U.S. economists expect inflation momentum to slow again in the fall and winter. More than the Fed would like. Then the USD euphoria could quickly come to an end. But for the time being, those who do not think in the long term can rejoice (and why should they do so in the currency market with its low transaction costs).
What Fed Chairman Jay Powell had to report about tapering (the reduction of Fed securities purchases) was quite boring.
Because it was (1.) only what had to be expected anyway: That they will regularly look whether the “sufficient progress”, which is the criterion for the tapering start, is getting closer.
And (2.) the timing of the tapering start has become less relevant for the FX market since yesterday anyway. So far, it has been important mainly as an indicator of how the FOMC is working and therefore as an indirect indicator of when the liftoff is to be expected. But we received sufficient direct information about this yesterday. From a currency market perspective, the tapering issue (which is keeping the bond market so busy) has therefore probably become largely irrelevant.
In principle, this is a good signal for US monetary policy and thus for the dollar. Because it makes it less likely that the Fed will get bogged down in a monetary policy impasse. It was meaningful that Powell referred several times to the sad situation in which the ECB finds itself….
If the USD strength is continuing, it could indeed weaken the Stock Markets.