The Federal Reserve left the federal funds rate at 3.50%-3.75% for a fifth straight meeting, and the dollar sold off on the relief that no tightening arrived. Three regional Fed presidents dissented in favour of a 25 basis point hike, and rate futures now lean toward an increase in September.
The U.S. dollar posted its worst day in about four weeks on Wednesday after the Federal Reserve held interest rates steady, allaying fears that the central bank would surprise the market with policy tightening. The U.S. dollar index, which tracks the greenback against a basket of six major peers, slipped 0.5% to 100.89.
Three Fed presidents dissented in favour of a hike
The Federal Open Market Committee kept the federal funds rate unchanged at 3.50%-3.75% for a fifth straight meeting. That action had been mostly expected, but the odds of a rate hike had been higher than recent historical trends because of rapidly shifting inflation dynamics sparked by volatile oil prices.
Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all voted to raise the rate by 25 basis points. Chair Kevin Warsh told the post-decision press conference the committee had what he called a "good family fight", an active and robust discussion centred on persistent inflation, recent economic shocks, the price pressures arising from those shocks, and monetary policy tools. He said the three dissents did not capture the full essence of that discussion, and that soft June inflation data had little effect on the rate decision.
Treasury yields did some of the tightening
Rising U.S. Treasury yields have effectively played the role of a rate hike, because an increase in yields usually makes borrowing more expensive for consumers and businesses. The benchmark 10-year yield has jumped more than 14 basis points since the Fed's June meeting.
On Wednesday, the 10-year yield climbed 8.1 basis points to 4.685%, while the 30-year rose nearly 12 basis points to 5.211%. Rather than signalling where policy is headed, Warsh emphasised that the economy, inflation and ultimately the bond market will determine the path of interest rates.
Euro and sterling catch a bid, yen firms
A weaker dollar lifted the euro, which gained 0.7% to $1.1462, while sterling added 0.6% to $1.3361 ahead of the Bank of England's rate decision on Thursday. The Japanese yen strengthened against the dollar for a fourth day in six, with USD/JPY falling 0.3% to 163.41.
The Australian dollar was the exception, falling 0.3% to $0.6953. Government data earlier showed annual consumer inflation in June rose 3.8%, moderating from May's 4.0% growth, while annual trimmed mean consumer inflation was unchanged at an increase of 3.6%.
President Donald Trump, whose pick Warsh took over from Jerome Powell in May, refused to turn on the central banker despite the absence of the rate cuts he wants, describing him as brilliant and saying a political board wants to keep rates up. Rate futures markets currently see a greater than 60% probability of a quarter-point increase when central bankers meet again in September.
Sources: Investing.com, investingLive, Investing.com
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