Dollar slips as the Fed is most likely done

• Fed swaps show only an 18% chance of a hike in September (under 50% for November)
• FOMC to take data-dependent approach on future hikes
• Fed no longer forecasting a recession

The dollar declined as US stocks embraced a patient Fed Chair Powell that will remain dependent with the next two inflation reports before committing to what they will do in September.  The Fed is probably done raising rates and that is keeping soft landing hopes alive.

Fed Decision

The Fed raised rates by a quarter-percentage point, bringing the target range to 5.25% to 5.50%, a 22-year high.  This was an easy FOMC decision as economic growth remains impressive, which is why the Fed will try to keep the door open for one last hike. The US economy is starting to feel the impact of the Fed’s rate hiking campaign and unless the housing market continues to heat up, the disinflation process should help bring rates back to target.

FOMC Statement

The statement did not deliver any surprises as the Fed emphasized that inflation remains elevated and they will continue to assess additional information and its implications for monetary policy.  Economic growth is softening as the June statement said economic activity is expanding at a modest pace, while now it is at a moderate one. 

The Fed is keeping optionality for future rate increases but it probably won’t need them.  The disinflation process will remain as the economy is weakening and the corporate world should start feeling the impact of tighter credit conditions. 

FOMC press conference

Powell noted that the FOMC will take a data-dependent approach on future hikes.  He acknowledged the rebound with housing and highlighted that they are waiting for the full effects of their tightening.  Powell clearly stated that it is possible that they’d raise or hold in September if data warranted it. 

The Fed is going to be locked in with all the key inflation data points.  The June CPI report was cooler-than-expected, so if that trend continues, the Fed will probably skip in September.  The Fed will have two inflation reports before it meets again, with the core remaining quite elevated. 

The Fed clearly believes a soft landing is achievable as the staff no longer is forecasting a recession.

FX

The dollar softened as the Fed signaled they will be patient with future rate hikes, which suggests if they deliver one more hike that will most likely be in November. The economy should weaken going forward and that should support a shifting of the focus from just inflation to also including recessionary fears.  Both the euro and pound rallied against the dollar as their respective central banks have clearly signaled more tightening will occur beyond the summer. 

EUR/USD has clearly found support ahead of the 1.10 handle, which suggests prices could stabilize until we get to the ECB meeting.  The 1.1150 remains key short-term resistance.

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