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FOMC: Dollar rises, gold extends fall after Fed policy statement

The highly anticipated May FOMC statement was issued on Wednesday, and the results were mostly in-line with expectations. The Fed Funds rate remained unchanged at 0.75-1.00%, as widely expected, after a unanimous vote. One moderate surprise, however, was found in the Fed’s discussion of its balance sheet policy. Although there had been some chatter prior to the meeting that the Fed may be looking to reduce its massive asset holdings, Wednesday’s FOMC statement once again asserted that the Fed is maintaining its existing policy with respect to its balance sheet “until normalization of the level of the federal funds rate is well under way.”

While the policy decision and statement did retain some of the Fed’s characteristic dovishness, it also contained some hawkish undertones, giving the distinct impression that the previous outlook for at least three rate increases in 2017 (inclusive of the recent March hike) is still very much in play. Acknowledging the recent disappointment in US GDP data for the first quarter, the FOMC statement asserted that “the Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.” As in March’s statement, the Fed also went on to express its view that “labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.”

In another departure from March’s statement, and in likely acknowledgement of the sharp disappointment in March jobs data, Wednesday’s statement also focused more optimistically on average employment increases over the past few months, saying that “job gains were solid, on average, in recent months, and the unemployment rate declined.”

Finally, a few other wording changes also reflected a more optimistic outlook despite less-than-stellar recent data. On consumer spending, “household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid.” And despite last month’s low inflation readings for March, “inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective.”

Overall, despite the Fed keeping rates steady as expected and failing to implement any reduction in its balance sheet, the FOMC statement still painted a more confident and hopeful picture of the US economy than might have been expected given rather lackluster economic data recently. In the aftermath of the statement’s release, the US dollar climbed further while gold extended its sharp fall. Next up on the radar for the dollar and gold will be Friday’s potentially pivotal jobs report for April, where the markets will find out whether or not March’s disappointing jobs data was just an anomaly in an otherwise solid US employment environment.

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