The Federal Reserve concluded its 2-day policy meeting on Wednesday with a surprisingly upbeat statement by the FOMC (Federal Open Market Committee).
The US central bank announced that its stimulus program of bond purchases will stop at the end of October, as was widely expected by the markets. What was not expected was the more hawkish tone in the statement as it showed that the Fed had more confidence in the US economy and did not seem too bothered about global financial turmoil that has affected the markets recently. Some had feared that the Fed would be concerned about weakness in one of its major trading partners – the Eurozone – as well as other economies such as China, and expected this to be a reason for the continuation of QE (quantitative easing), at least to the end of the year.
The fact that the Fed did not make any reference to the risks of the slowing growth in Europe and the recent volatility in the financial markets meant that it did not see any risk to the US economic recovery and even pointed to the fact that progress was being made in the labor market. The FOMC statement made reference to “sufficient underlying strength in the broader economy” to support more improvements in unemployment. It said that slack in the labor market was “gradually diminishing.”
The Fed’s more optimistic outlook on the labor market led many to believe that US inflation data will grow more important than jobs data in the months ahead.
The Fed signaled that the inflation rate should move back up to progress toward the central bank’s 2% target rate. It explained that despite the lower energy prices and other forces that were holding inflation down, it believes that an improving US economy should help inflation rise.
“The Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year,” the FOMC statement said.
The currency markets reacted positively to the Fed’s hawkish policy tone and the dollar’s appeal was boosted as US treasury yields rose. The more upbeat FOMC statement was a relief to investors especially after a recent bout of soft US data on pending home sales and durable goods orders.
The timing and pace of rate hikes would depend on incoming economic data, the Fed said.
Soon after the FOMC announcement on Wednesday, the yield on the benchmark 10-year Treasury note jumped to a 3-week high of 2.362% and the greenback hit a 3-1/2 week high against a basket of currencies. Against the yen, the dollar broke above the key technical level of 109.00 for the first time in over 3 weeks.