Surprising communications on likely rate hikes and inflation over the course of 2022 produced what is seen as a more hawkish tilt to the Federal Reserve’s monetary policy.
January 2022 FOMC Statement and Federal Funds Rate
Yesterday saw the FOMC release its bi-monthly Statement and Federal Funds Rate. The Federal Funds Rate was kept at 0.25% as had been widely expected. The statement also contained nothing that was not widely expected. The hawkish surprises were in communications shortly after the release by the Chair of the Federal Reserve Jerome Powell.
The statement made clear there would be a rate hike at the next FOMC meeting in March, and that net asset purchases (quantitative easing) would end by this time. In a separate communication released at the same time, the Fed stated that reducing the size of its balance sheet would begin after the initial rate hike in March. There were no surprises here.
Things got more interesting during the press conference by the Fed Chair which started half an hour after the releases.
Hawkish Surprise Statements
Powell made the following statements which surprised the market and created a more hawkish picture of the Fed’s monetary policy:
- He ignored all questions about the timing and size of rate hikes, refusing to be drawn on whether any of them might be larger than 0.25% or whether the hikes might be “front loaded” towards the earlier part of 2022. This evasion has been seen as significant by analysts as Powell could be expected to try to calm fears of faster, stronger hikes unless he was seriously considering them.
- He stated that he would raise his earlier PCE forecast slightly, meaning his outlook has worsened a little on future inflation. The FOMC already dropped its “transitory” language to describe current historically high rates of US inflation.
These were enough to spook markets. US stock market indices rose upon the initial release but began to fall as soon as Powell’s press conference began. The “hawkish surprise” from the Federal Reserve yesterday has come in the form of increased pessimism over inflation and the need to hike rates more quickly and strongly than had been expected.
What Does This Mean for Traders?
Every so often there are important releases by the FOMC which strongly shape the Forex market and begin or give fresh impetus to long-term trends. This may be one of those releases and all traders, especially Forex traders, should pay attention. The release can be said to have moved markets by causing selloffs in stock markets, and by boosting the US dollar and the Japanese yen as a safe-haven currency, while triggering a selloff in more risky currencies such as the New Zealand dollar.
Traders should consider going with this flow, especially as it may persist for some time, by not looking for long trades in stock market indices, being very cautious before taking any long trades in non-agricultural commodities, and to see Forex trade opportunities in the direction of long USD or JPY and short of NZD, AUD, and possible EUR and GBP.