Yesterday, the Federal Reserve concluded its two-day meeting
and released the interest rates decision. As expected, the bank left interest
rates unchanged and announced that it was taking a pause on more hikes. The
officials blamed this on the tepid inflation rate, the uncertainties about the
global growth, and the uncertainties about trade. This sent the US dollar
plummeting as shown in the chart below.
In a statement, the Fed said
continues to view sustained expansion of economic activity, strong labor market
conditions, and inflation near the Committee’s symmetric 2 percent objective as
the most likely outcomes. In light of global economic and financial
developments and muted inflation pressures, the Committee will be patient as it
determines what future adjustments to the target range for the federal funds
rate may be appropriate to support these outcomes.
The Fed has been under spotlight for a while now. First, the
US president has continued to criticize the agency for the continued
tightening. He views the officials as if they are working to undermine his
administration. Therefore, if the Fed failed to hike in the December meeting,
there were concerned that the decision would be viewed as being political.
Second, the Fed has been criticized by leading figures who view their policies
as being misinformed. Before the December meeting, a number of respected
figures like Jeffrey Gundlach asked the Fed not to hike. Third, recent data has
shown that the economy is softening in the United States and around the world.
In fact, the US economy expanded by about 2.5% in the fourth quarter after
rising by 4.2% in the second quarter.
In response to the Fed’s decision, Mohammed El Erian, who
was being considered for a Fed job said the following:
To me, the most
salient takeaway is that the calibrated removal of unconventional measures is
proving a lot trickier than many expected. There is no reason to think that
this will change anytime soon absent a marked improvement in the global
economy. With that, central banks will inadvertently continue to be occasional
amplifiers of market volatility, up and down — a far cry from their previous
role as effective volatility repressors.
Moving forward, there is a likelihood that the dollar will
remain under pressure. However, the fact that other central banks too like the
ECB, BOJ, and BOE may continue their holding pattern may mean that the
currencies could move in a sideways direction. It also means that stocks will
likely continue to rally. This is because the markets don’t love high interest
rates. As shown below, the US indices rallied yesterday after the open.