A non-event with slightly hawkish undertones

April 28, 2016

Despite a quick flurry of market activity on Wednesday’s release of the latest FOMC statement, the overall market reaction after the release has been conspicuously muted. This was due to the fact that the statement gave very little in the way of any new direction for US monetary policy.

As expected, interest rates were left unchanged. Aside from this, the FOMC reiterated once again that its policy outlook will continue to be dependent upon economic data going forward, and that its pace of tightening would likely be gradual. The statement went on to provide mixed assessments of economic conditions, mentioning improvements in the labor market but a slowdown in economic growth indications. Furthermore, as at the last FOMC meeting, there was only one dissenter – Kansas City Fed President Esther George – who voted for a rate hike.

The one moderately hawkish aspect of the statement occurred not in its actual content, but in its omission of a key assertion from the previous statement in March. This time, the FOMC left out reference to global economic and financial risk, which indicated the Fed’s acknowledgement of a recent stabilization in world markets, especially when compared to the turmoil that occurred earlier in the year. Despite the fact that the FOMC statement did not introduce any new information, this omission of the key phrase on global risk was seen as somewhat of a hawkish signal that potentially increases the possibility of a rate hike at the FOMC’s next meeting in June.

The immediate market reaction to the Fed’s statement was a spike in the dollar and a fall in gold, followed by a short period of whipsaw for both. As the markets digested the news, however, both the dollar and gold returned to the range in which they had been trading prior to the release of the statement.

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