The U.S. dollar fell against most of its major counterparts on Wednesday as investors perceived that Federal Reserve Chairman Jerome Powell’s comments following its two-day policy meeting suggested that the U.S. central bank may be done raising interest rates.
As expected, the policy-setting Federal Open Market Committee (FOMC) kept interest rates in the 5.25%-5.50% range, where they have been since July. The Fed did not rule out another hike, acknowledging the economy’s unexpected resilience despite the aggressive tightening it began more than a year ago.
But Powell’s remarks in his press conference were laced with mixed messages, leaving investors doubtful that the Fed will raise rates again.
Powell said the Fed has a long way to go to get inflation to 2%, citing the resilience of economic data and labor demand that could justify further rate hikes. But he noted that financial conditions have clearly tightened, and cited many risks.
“The most notable takeaway from his comments was that the risks around whether policy is ‘sufficiently restrictive’ are much more balanced,” Charlie Ripley, senior investment strategist at Allianz (ETR:ALVG) Investment Management in Minneapolis, said by email.
“This signals that while there is a potential risk for the Fed to do more, the bar for rate hikes has been raised, and we are clearly seeing this play out with two consecutive meetings of no policy action from the Fed.”
The Dollar Index, which initially rose after the Fed’s statement, was last slightly lower at 106.64. It has been trading sideways since hitting a near one-year high of 107.34 in early October as U.S. bond yields rose sharply on strong economic growth.
The Fed’s latest statement noted that with job gains still “strong” and inflation still “elevated,” the central bank continues to “consider the extent of additional policy firming that may be appropriate to bring inflation back to 2% over time.”
Still, U.S. interest rate futures have added to bets that the Fed is done raising its benchmark rate and will start cutting rates by June. Bets on a rate hike in December and January have shrunk to 19 percent and 30 percent, respectively, from 28 percent and 39 percent late Tuesday.
“Powell had several opportunities to threaten another rate hike, but passed on most of them,” U.S. economist Tom Simons wrote in a research note after the Fed meeting.
“The answers to questions from the press were consistent with the high level of uncertainty about the outlook and how much lagged tightening from previous moves is still in the pipeline.”
Against the yen, the dollar fell 0.6% to 150.89. The currency pair typically tracks movements in U.S. two-year Treasury yields, which fell 11.5 basis points to 4.958.
The beleaguered yen has also risen from a one-year low against the U.S. dollar and a 15-year low against the euro on threats of intervention from Japanese authorities, with more hawkish than usual comments from Japan’s top currency diplomat, Masato Kanda.
Wednesday’s data also showed slowing momentum in the world’s largest economy, putting the dollar on the defensive for parts of the session.
U.S. manufacturing contracted sharply in October after improving in previous months as new orders and employment slumped.
Data on U.S. private payrolls rose less than expected in October and wage growth moderated. Private payrolls rose by 113,000 jobs last month after adding 89,000 in September, according to the ADP National Employment Report.
In other currencies, the euro was flat at $1.0570.
The dollar fell 0.3% against the Swiss franc to 0.9079 francs.
