- The dollar falls as the Fed’s target interest rate draws closer.
The Federal Reserve increased interest rates as expected on Wednesday, sending the dollar to a nearly seven-week low. Yet, the phrasing in the central bank’s announcement hinted that interest rates were nearing their peak.
The dollar index fell 0.7% against a basket of currencies to 102.185, it’s lowest since early February.
Within the range of the market’s forecasts, the Fed increased rates by 25 basis points to 4.75%–5%. However, a tweak in the bank’s phrasing suggested a prospective policy move that would cause the bank to reach its terminal rate earlier than anticipated.
The central bank announced it would increase rates this year by at least 25 basis points. In contrast to its previous language, which stated that “ongoing increases in the target range will be appropriate,” it also added that “some additional policy firming may be appropriate,” a statement that it had previously made in every policy meeting since March 2022, when it had started its most recent hiking spree.
The central bank said it was not considering any rate reductions this year and kept its prediction for the benchmark rate unchanged from December. It predicted a high rate of 5.1% in 2023.
To contain increasing inflation, the Fed raised rates by a total of 500 basis points over the past year. That was the Fed’s most aggressive tightening campaign in 40 years.
Yet, the recent failure of some small regional U.S. banks sparked worries about the impact of rising interest rates on the economy. The occurrence sparked increasing bets that the Fed had limited economic headroom to remain hawkish this year, even though the bank had promptly intervened to avert a greater catastrophe and restore confidence in the financial system.
‘’Going further and faster into restrictive terrain inherently gives you less influence over the result, according to ING analysts, who said in a note that this had been the most aggressive monetary policy tightening cycle in 40 years.’’
Nonetheless, Chairman Jerome Powell downplayed worries of a worsening crisis on Wednesday by stating that the banking sector is “sound and robust.” Given that pricing pressures have remained persistent in recent months, he also reaffirmed that the fight against inflation would likely continue.
Although ING predicted higher economic headwinds from a more restrictive posture, markets are still pricing in at least a 25 bps to 50 bps rate decrease this year.
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