The U.S. Federal Reserve implemented a "dovish" but, at the same time, most expected scenario at the end of the June meeting. The Fed did not raise the interest rate, leaving all monetary policy parameters as they were. The regulator tried to maintain a certain balance: after preserving the status quo, it voiced very hawkish rhetoric.
The wording of the accompanying statement (as well as the entire text of the final communique) provided temporary support for the greenback, thereby dampening the upward impulse of the EUR/USD. The dot plot also favored the dollar, indicating that the June decision was merely a pause rather than a definitive end to the current monetary policy tightening cycle. Nevertheless, the dollar did not ultimately benefit from the June Fed meeting.
Hawkish undertones of the June meeting
In the accompanying statement, the central bank indicated that economic activity continues to grow at "moderate pace," as evidenced by the latest macroeconomic indicators. The Fed highlighted the positive aspects of non-farm payrolls, downplaying negative factors such as the disappointing ISM indices. The central bank stated that there has been a "significant increase in employment" in recent months, and the unemployment rate remains low.
Additionally, the Fed emphasized that the U.S. banking system is "strong and resilient." It is worth recalling that in May, Jerome Powell highlighted the relevance of a banking crisis in the United States, stating that banking stress "reduced the need for an interest rate hike." Given the spring bankruptcies of Silvergate, Signature Bank, and Silicon Valley Bank, Powell's statement was essentially capitulatory in nature. However, following the June meeting, the Fed significantly softened its evaluative formulations, yet still acknowledged that tighter lending conditions for households and businesses are likely to "affect economic activity, employment, and inflation." However, the extent of these consequences, according to the members of the central bank, remains uncertain.
The central bank also expressed its traditional concerns about inflation, despite the recent Consumer Price Index growth report being in the red. The Fed members pointed out that inflation remains elevated, which is why the Committee remains "highly attentive" to inflationary risks.
Overall, the tone of the accompanying statement was optimistic. However, the central bank specifically highlighted inflation, which continues to remain at an unacceptably high level.
The tone of the final communique temporarily supported the dollar, especially in light of the updated dot plot. The forecast for the final rate at the end of this year was revised upwards to 5.6% (compared to the March forecast of 5.1%), implying two more rate hikes this year. Additionally, the forecast for the rate at the end of 2024 increased to 4.6% (from the previous projected value of 4.3%).
What did Powell say?
Commenting on the outcome of the June meeting, Federal Reserve Chairman Jerome Powell stated that the central bank will continue making decisions "meeting by meeting." According to him, the pace of economic growth in the United States and the dynamics of the labor market turned out to be better than expected, considering the aggressive tightening of monetary policy last year. In Powell's opinion, this fact, firstly, contributes to the Fed's ongoing fight against inflation and, secondly, allows the central bank to pursue this fight with less economic damage.
Regarding the June pause, according to the Fed Chair, it was done "out of caution." Powell noted that this decision will allow the regulator to gather more information before determining whether to raise rates again or not, as the pace of monetary policy tightening is now "less important than finding the end point of the current cycle."
Perhaps, this is the key phrase from Powell's final press conference. In essence, the fate of the interest rate is now in the hands of key macroeconomic indicators, primarily inflation and the labor market. Yes, on the one hand, the Federal Reserve has allowed the possibility of two 25-basis-point rate hikes by the end of this year. But on the other hand, the central bank may not exercise this "option" if inflation continues to demonstrate a downward trend. The central bank did not explicitly hint at a rate hike in July.
That is why the dollar remained under pressure following the June meeting, despite the hawkish tone of the accompanying statement. After all, every inflation release that falls in the "red zone" will de facto reduce the probability of a rate hike at the next meeting. By the way, yesterday's report on producer price index growth reflected a significant slowdown. The overall index fell to 1.1% YoY versus the anticipated decline to 1.5% (the indicator has been declining for the 11th consecutive month). The core producer price index showed a similar trend, which fell to 2.8% in May, compared to an anticipated decline to 2.9%. In this case, the indicator has been declining for the 14th consecutive month.
Conclusions
The greenback did not benefit from the June FOMC meeting. The formal hawkish stance of the Fed and the "battle-ready" dot plot did not assist the dollar bull. Powell's cautious rhetoric did not allow the dollar to strengthen its position. The head of the Federal Reserve indicated that the U.S. economy has not fully experienced the consequences of monetary policy tightening. At the same time, Powell noted that further rate hikes this year would be "appropriate."
We would like to add: appropriate, but not obligatory.
