Fed Chairwoman Janet Yellen caused quite a stir among the major currency pairs during this week’s FOMC statement. Aside from deciding to carry on with the central bank’s taper plan, Yellen also dropped a few pro-dollar announcements.
Perhaps the biggest of these announcements is her hint that the Fed might start hiking interest rates around six months after the asset purchases end. Take note that the Fed has tapered purchases for the third consecutive meeting from when it first reduced stimulus by $10 billion from $85 billion to $75 billion in December 2013. After this week’s meeting, the Fed is set to make $55 billion in asset purchases by April.
Yellen mentioned that it would take a considerable time before rate hikes are considered but the press conference revealed that it might take place next year. After all, the Fed did upgrade its growth forecasts for 2015 and 2016, which means that they think the US economy will keep recovering until then.
FOMC Statement and the Dollar
In addition, policymakers also improved their jobless rate forecasts for the next couple of years. However, Yellen cautioned that the economy is miles away from achieving full employment for now. She announced that the Fed would drop its forward guidance with the 6.5% jobless rate threshold, following her previous remarks saying that the jobless rate is no longer an adequate measure of labor market conditions.
With that, qualitative guidance is expected from the Fed moving forward. This means that the US central bank will take the data in stride and not give any specifics on what target levels must be reached before monetary policy will be tightened.
For some analysts, this sparks the start of less transparency from the Fed, as market watchers will also have to either interpret the data themselves to make predictions for monetary policy or simply wait for actual statements from FOMC officials. Fundamentals might keep supporting the US dollar in the near term, along with risk sentiment.
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