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Fed Quick Analysis: Five hawkish moves that may push the dollar higher

  • The Fed cut interest rates by 25 basis points as expected.
  • Several changes in the statement hint that the bank is set to pause.
  • The US Dollar may advance once the dust settles.

"Hawkish cut" is what the markets had expected and precisely what the Federal Reserve has done. While the Fed cut rates for the third consecutive time, five critical hawkish developments may boost the dollar.

1) Appropriate path of interest rates

A small semantic change can do wonders. The Fed abandoned the pledge to "act as appropriate" to "it assesses the appropriate path," – thus lowering the chance of an imminent cut. 

2) Subtle change on inflation

When referring to market-based measures of inflation, the Fed now sees them as steady, saying they "remain low" against "have declined" – no more adverse developments.

3) Content with employment

The Fed reiterates that job gains have been solid and that the unemployment rate remains low. It seems to be shrugging off the slowdown in hiring. Is it hinting that Friday's jobs report will be upbeat? 

4) Bullish on consumption

Officials were satisfied with their two mandates of inflation and employment, and they are also bullish on consumption. They state that household spending has been rising at a strong pace. They do not seem to worry that the American consumer is holding the economy on its own. 

5) Hawkish dissent

Esther George, President of the Kansas branch of the Federal Reserve, and Eric Rosengren, her peer from the Boston Fed, voted against the cut. The pair have been persistent in rejecting additional stimulus.

Moreover, James Bullard, that voted in September for a double-dose 50bp rate cut has voted with the majority – no dovish dissenters.

Dollar reaction

All in all, the Fed has made a full "hawkish cut."

On this background, the US dollar has room to rise. The greenback's reaction has been initially muted, as markets are cautious. However, once the dust settles from Fed Chairman Jerome Powell's press conference, currencies may move. 

Background: What the Fed was considering

The Federal Reserve has been dealing with conflicting economic signals. The consumer remains robust, with upbeat confidence, robust retail sales, and rising wages. On the other hand, manufacturing is suffering from a slump, and the jitters in investment are worrying. 

The most recent figures have shown only a modest slowdown in growth, to 1.9% annualized, but the same trends of strong consumption and contracting exports and investment. 

And while the US and China agreed on Phase One of the trade deal, the level of uncertainty remains elevated, and damage to the economy has been done. 

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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