As expected, the Federal Reserve (Fed) left interest rates unchanged yesterday - but at the same time provided a few hints in its statement that a rate cut is imminent. Inflation is now only 'somewhat elevated' rather than 'elevated'. And the FOMC is now wary of the two-sided risks to its dual mandate, Commerzbank’s FX analyst Michael Pfister notes.
“Nevertheless, policymakers still want to gain greater confidence that inflation will return to the 2% target. The statement was therefore only a small step towards a turnaround in interest rates; the market was probably hoping for clearer signals and the US Dollar (USD) initially benefited from the statement.”
“This did not last long, however. During the subsequent press conference with Fed Chairman Jerome Powell, it became increasingly clear that the FOMC was on the verge of cutting rates for the first time. Although Powell initially tried to keep all options open for September, the hints became clearer as the meeting progressed.”
“Powell has shifted the focus in many of his comments to the labour market. Inflation is no longer seen as the main problem, but the dual mandate really is one again. This is a continuation of what we have seen in recent weeks and increases the importance of tomorrow's US payrolls report.”
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