Fed downgrades economic outlook but optimistic about inflation

The U.S. dollar shot up immediately after the release of the FOMC statement on Wednesday. EUR/USD dropped from near 1.1150 to 1.1095, while USD/JPY jumped from 118.65 to 119.05. The dollar has since given back some of its gains, mostly against the yen.

The Fed downgraded its economic outlook but noted that growth “slowed” during the winter months and was due to “transitory factors.” This suggestion that the slow growth will ‘fade’ helped the greenback.

The FOMC basically kept policy on hold, and provided no explicit forward guidance in the statement, as expected (the vote was a unanimous 10-0). Its downgraded economic outlook, was consistent with their forecasts presented last month in conjunction with the March FOMC, and with the evidence from recent data of further slowing in growth (capped off with today’s Q1 GDP). The Fed added the pace of job growth “moderated,” while spending “declined.”
Additionally, business fixed investment “softened,” recovery in housing remained “slow,” and exports “declined.” It repeated that inflation continued to run below target but expects it to reach the Fed’s 2% target as the effects of low oil prices will fade. With no specific calendar references in terms of liftoff, all upcoming meetings are in play. But action as soon as June is unlikely.

The following are some comments from economists:


“We’ve seen some disappointing data lately but the fed is characterizing it as partly transitory so I don’t think this really changes too much.

“There’s still likely going to be a rate hike this year. I think they will be watching closely the data we get from the second quarter to make sure those things that hurt the economy in the first quarter were really transitory.
“I think the Fed has long been saying that low inflation was potentially transitory anyway because of the drop in oil prices. Oil has stabilized and started to firm up so that’s consistent with the Fed expecting inflation to move back toward its target.

“The dollar’s gotten a little stronger on the statement but not a lot. It did pop a little on the news. The Fed is still leaving open the possibility they still will raise rates.
“Saying that some of the weakness is transitory confirms that the dollar probably overdid it this morning.”


“On net it seems to be a little dovish given the weaker-than-expected activity we have seen. The rest is just conforming to the economic reality. They are keeping everything close to the vest. This doesn’t give you a lot to go on as far as timing of a liftoff. This statement is intentionally balanced. It’s very neutral with a slight dovish tinge.”

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