The Federal Reserve raised the fund's rate by 25 basis points yesterday, and yet the US dollar fell. So why didn't the greenback trade higher after a hawkish Fed?
The US Federal Reserve started a tightening cycle yesterday. It allowed rates to take off by 25 basis points, as expected by market players.
The main reason given by the Fed for raising the federal funds rate was inflation. It is much higher than the Fed's target, so a rate hike is completely normal.
But the Fed proved to be even more hawkish. For example, the Russian-Ukrainian war is seen as inflationary, indicating rising inflation and therefore more rate hikes from the Fed.
Additionally, Bullard, one of the FOMC members, was a dissenter. He wanted a 50bp rate hike. Consequently, the Fed was hawkish, yet the US Dollar declined, as evidenced by EUR/USD, AUD/USD, and GBP/USD, closing the day at their highs.
One of the key takeaways from yesterday's statement and press conference is that quantitative easing (QE) has come to an end. The Fed no longer buys bonds to accommodate the economy. Instead, he raised rates in a U-turn.
Moreover, quantitative tightening (QT) is about to start soon. Consequently, monetary conditions will tighten further.
The Russian-Ukrainian war is inflationary
US inflation hit 7.9% in February, and the Fed responded with 25 basis points. He couldn't raise rates while QE was running, but now that QE is officially over, he's going meeting by meeting in his decision to raise rates.
One point highlighted by Jerome Powell is that the Russian-Ukrainian war further contributes to disruptions in global supply chains. Therefore, expect even higher inflation in the short to medium term.
Bullard wanted a 50bp rate hike
Bullard was an air freshener. Instead of 25 basis points, he voted for a 50 basis point increase, putting a hawkish spin on yesterday's rate hike.
Why a twist?
The reason is that the Fed has already explained its decision well in advance. Therefore, it has been integrated into the price. But Bullard's dissent represented a hawkish development.
Nevertheless, after initially gaining ground, the US dollar fell all the way. One way to explain it is that the rate hike is insignificant, given the higher rate of inflation and expectations for it to rise further.