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 the following:
The Committee 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.