FOMC Recap: Fed Holds, but Not Quite the “Hawkish Hold” Traders Expected

Federal Reserve, FOMC Key Points

• The Federal Reserve’s FOMC held interest rates in the 3.50-3.75% range, as expected, in a 9-3 vote.
• Traders are viewing the meeting as dovish in the near-term, though perhaps reflecting a central bank that may be falling behind the curve in fighting inflation
• The US Dollar Index (DXY) is falling sharply, both because there was no immediate rate hike and because the likelihood of an increase in September is seen as lower.

FOMC Interest Rate Decision

The Federal Reserve’s FOMC kept interest rates unchanged in the 3.50-3.75% range, as expected. The vote was 9-3, with Beth Hammack, Neel Kashkari, and Lorie Logan dissenting.

There were no other changes to monetary policy at today’s meeting.

FOMC Monetary Policy Statement

In its accompanying monetary policy statement, the FOMC made no meaningful changes:

Source: Federal Reserve

FOMC Chairman Warsh’s Press Conference

In his second press conference as Chairman, Kevin Warsh followed the same script as he did in the first, deflecting when asked to provide forecasts for the economy and future FOMC actions. He resolutely defended the Fed’s 2% inflation target, though ultimately, those words will have to be backed up with actions (read: interest rate hikes) if inflation continues to print above the FOMC’s target

Highlights from his comments follow [emphasis mine]:

• THE ECONOMY IS SHOWING IMPRESSIVE RESILIENCE EVEN WITH THE RECENT SHOCKS
• THERE IS NO SOFT INFLATION TARGET
• WE TALKED A LOT ABOUT PAST FIVE YEARS OF HIGH INFLATION
• I'VE BEEN TRYING TO GET UNFILTERED MESSAGE FROM MARKETS
• MARKET PRICES DIDN'T PAUSE IN INTERMEETING PERIOD
• I ASKED FOR A GOOD FAMILY FIGHT AND I GOT ONE
• WE WILL DELIVER 2% INFLATION
• IF INFLATION STAYS HIGH, RATES COULD BE PART OF SOLUTION
• I WOULDN'T CHARACTERIZE WHAT WE DID TODAY LIKE A PAUSE
• ECONOMY OUTPUT IS SOLID, LABOR MARKET SOLID – STEADY
• PCE IS OUR NUMBER, AND WE'RE STICKING WITH IT
• TO ACHIEVE 2% INFLATION, I AM LOOKING AT A BROADER SET OF INFLATION DATA THAN JUST PCE
• CENTRAL BANKERS ARE INCLINED TO TIGHTEN WHEN INFLATION RISES
• I AM COMMITTING TO PRESS CONFERENCES UNTIL YEAR-END.

In terms of the market’s reaction, traders are viewing the meeting as dovish in the near-term, though perhaps reflecting a central bank that may be falling behind the curve in fighting inflation. As we go to press, the 2-year Treasury yield is falling -10bps from pre-meeting levels, with the 10- and 30-year yield both rising. Broad US indices have bounced off their lows, and the US dollar is falling sharply. Current market-implied odds of a rate hike in September have fallen to closer to 60% from above 80% this morning.

US Dollar Technical Analysis – DXY Daily Chart

Source: StoneX, TradingView

Speaking of the world’s reserve currency, the US Dollar Index (DXY) is falling sharply, both because there was no immediate rate hike and because the likelihood of an increase in September is seen as lower. From a fundamental perspective, the market’s focus shifts back toward Iran developments, with President Trump stating he would hit Iran hard after strikes on US bases in Jordan, but the FOMC meeting may have marked a near-term top in the greenback nonetheless.

Additional downside pressure would target the July low near 100.50 in time, whereas any bounces may be limited to the mid-101s unless/until the path to an FOMC rate hike becomes clear.

-- Written by Matt Weller, Global Head of Research

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