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EURUSD Intraday Analysis & FED’s decision

The U.S. Federal Reserve held interest rates steady on Wednesday and signaled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.
Indeed, Fed Chair Jerome Powell said it was likely to take longer than previously expected for U.S. central bank officials to gain the “greater confidence” needed for them to kick off interest rate cuts. “Inflation is still too high,” he said in a press conference after the end of the Federal Open Market Committee’s two-day policy meeting. “Further progress in bringing it down is not assured and the path forward is uncertain.”
“It is likely that gaining greater confidence will take longer than previously expected.”
Nevertheless, Powell said he still expects inflation to ease over the course of this year. “That’s my forecast,” he said. “I think my confidence in that is lower than it was because of the data that we’ve seen.” U.S. stock and bond prices turned higher as Powell spoke, with investors embracing a view that the central bank chief was not as “hawkish” as had been feared in the wake of a run of disappointing inflation data on inflation in recent months.
Powell’s remarks to reporters proved “notably less hawkish than many feared, lining up behind the FOMC statement rather than whipsawing the market,” said analysts at Evercore ISI. For Powell, “the basic message was that cuts have been delayed, not derailed.”
Investors in contracts tied to the Fed’s policy rate drove up prices, betting more strongly on prospects that rate cuts could begin in September rather than later in the year as reflected in earlier market pricing.
The Fed’s latest policy statement kept key elements of its economic assessment and policy guidance intact, noting that “inflation has eased” over the past year, and framing its discussion of interest rates around the conditions under which borrowing costs can be lowered. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%,” the Fed repeated in a unanimously-approved statement that still indicated the next move on rates will be down.
That continues to leave the timing of any rate cut in doubt, and Fed officials made emphatic their concern that the first months of 2024 have done little to build the confidence they seek in falling inflation.
“In recent months, there has been a lack of further progress towards the Committee’s 2% inflation objective,” the Fed said in its statement. Where the prior statement in March suggested an improving dynamic, saying that the risks to the economy “are moving into better balance,” the new statement hinted the process may have stalled with its assessment that risks “have moved toward better balance over the past year.”
“The Committee marked to market on inflation by noting that Q1 data didn’t show the additional progress that they hoped to see, but the statement also suggested that they would not view further labor market strength through an inflationary lens,” said Omair Sharif, president of Inflation Insights.
Reuters Graphics
Reuters Graphics

The U.S. central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly.
The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed’s last round of “quantitative tightening.”
While the move could loosen financial conditions at the margin at a time when the U.S. central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.
The benchmark policy rate has been held in the current 5.25%-5.50% range since July. Rate cuts had been anticipated as early as March of this year, but have been pushed back as incoming inflation data showed that progress towards the 2% target had stalled. The personal consumption expenditures price index, the Fed’s preferred inflation gauge, increased 2.7% in March on a year-over-year basis.
“Inflation remains elevated,” the Fed said in its latest policy statement, repeating a phrase that many analysts feel will likely need to be removed as a precursor to an initial rate reduction.
The Fed maintained its overall assessment of economic growth, saying that the economy “continued to expand at a solid pace. Job gains have remained strong and the unemployment rate has remained low.”

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