Fed’s hawkish hold but dovish bias – Saxo Bank MENA Weekly Market Report


The Federal Reserve left policy rates unchanged at 5.25-5.50%, in line with expectations and the market pricing. There were only slight changes to the FOMC statement and the door for further rate hikes was left open. Officials noted that they were not confident that rates were “sufficiently restrictive” yet. While Powell tried to signal a hawkish hold, there was a sense that the Fed has come to the end of its rate hike cycle with little the Q3 GDP report or the blowout September jobs numbers not being read out to be very strong and warranting more rate hikes.

Powell still emphasized a data-dependent mode, and there are two more inflation reports and two employment reports ahead of the next meeting in December. But growth expectation was changed from ‘solid’ to ‘strong’ and there was some acknowledgement of higher longer-end yields, with tighter financial conditions mentioned alongside tighter credit conditions. Given the weakening consumer and business confidence trends and rising risks of delinquencies, the odds remain tilted to suggest that we have reached the end of the Fed’s tightening cycle. However, Powell was clear that the Fed was not thinking about rate cuts yet.

There was no dot plot at this meeting which could have clearly hinted whether officials see another rate hike or not, but a key signal came from Powell’s comment where he said that the September dot plot – which had another rate hike in place – is now outdated.

Overall, markets interpreted the meeting to have been dovish. Treasury yields slumped, with the 10-year yield down close to 20bps to sub-4.75% and the 2-year yield down 14bps and heading further lower to 4.92% in early Asian hours.

What does this mean for the path of the dollar?

The Fed meeting was just a confirmation of what we had been writing earlier. The upside in US dollar is getting limited with rate hikes coming close to an end and positioning getting stretched. But there remain no clear alternatives to the dollar at this point, and the USD is likely to remain supported until US economic data starts to weaken.