Dollar gains as Fed stays on hold
The dollar strengthened and broke below $1.15 to the euro again, to circa. $1.1460 currently, as the Fed stayed on hold at their June meeting. The greenback also made up some ground on sterling which pushed down to around $1.34. The Fed’s stayed on hold and their updated forecasts show higher inflation and weaker growth this year while the updated participant dot plot suggests a split among policymakers on when to act, though the majority favour easing policy in the second half of this year. The decision comes against the background of continued geopolitical and market uncertainty with President Trump indicating he has not decided one way or the other yet if the US should attack Iran.
US equities made some initial gains but these were erased when the Fed released their weaker forecasts. The S&P 500 closed more or less flat on the day while it was a mixed session in Europe with the FTSE making a small gain while the Eurostoxx lost 0.4%. With the Fed’s decision to stay on hold well expected and the forecasts and dot plot broadly in line with the market view, there was limited movement in US yields following the decision. 2-year yields were down just a basis point or two to 3.94% from 3.96% at the start of the day, while 10-year yields dipped down about 5 bps ahead of the announcement but came back up again, to stay largely unchanged at close to 4.4% overall.
The FOMC kept rates on hold with the Fed funds rate at 4.25% to 4.5%. The language in the statement changed to say that uncertainty about the economic outlook had ‘diminished but remained elevated’. The Fed’s updated forecasts saw downward revisions to growth with GDP now expected to be 1.4% this year (from 1.7% in the March projections) and inflation is revised higher, with core PCE at 3.1% (from 2.8%). This, presumably, incorporates downside impacts from tariffs with Powell saying in his press conference that ‘someone has to pay for the tariffs’ and that ‘increases in tariffs this year, are likely to push up prices and weigh on economic activity’.
Dot plot points to two rates cuts by year end. The updated interest rate path forecasts from participants show a clear majority favour rate cut(s) in the second half of this year with 12 of the 19 favouring at least one rate cut this year while 7 participants see no rate cut this year. This is slightly more hawkish than in March, but in reality, the largest number (8) are forecasting two rate cuts in the second half of the year which is in line with market pricing.
Powell’s language indicates Fed remaining on hold for now. He said the US had ‘a solid economy with decent growth’ and a ‘pretty good labour market’ which is not ‘crying out for rate cut’. At this point, the signals point to the Fed staying on hold in July, and probably in September too, before resuming rate cuts at the October meeting.
Looking to the day ahead, we get the Bank of England decision. With May’s inflation data yesterday showing UK core CPI remaining stubbornly high at an annual rate of 3.5%, that gives the MPC more reason to keep rates on hold today, which they are expected to do.