The EUR/USD pair is currently trading negatively, remaining flat after the Federal Reserve opted to keep interest rates unchanged in their latest meeting. As of now, the pair is around 1.1670, down about 0.48%, with many traders focusing on Chairman Powell’s upcoming press conference.
Fed Monetary Policy Statement
In its monetary policy statement, the Fed indicated that the economy is still doing well, noting that the unemployment rate has “remained largely unchanged in recent months.” They did acknowledge that inflation is on the rise, which they attribute to climbing energy prices linked to the situation in Iran.
The FOMC highlighted that they will take into account various factors, stating that “developing developments in the Middle East are contributing to high uncertainty about the economic outlook.”
The voting outcome was 8-4, with Fed Director Stephen Milan advocating for a rate cut. However, Beth Hammack, Neil Kashkari, and Rory Logan opposed including any bias toward easing in the statement at this point.
Markets are currently gearing up for Fed Chairman Jerome Powell’s monetary policy meeting scheduled for 6:30 p.m. Japan time.
EUR/USD Reaction to Fed Decision
With three FOMC members dissenting against the easing bias, the market perceived the statement as somewhat hawkish, causing the EUR/USD to dip below 1.1680.
Fed Frequently Asked Questions
Monetary policy in the U.S. is determined by the Federal Reserve Board (Fed), which has two main goals: achieving price stability and promoting full employment. The Fed adjusts interest rates as a primary tool to reach these goals. If inflation rises too quickly and exceeds the target of 2%, they will likely increase rates, raising borrowing costs and making the U.S. more appealing to international investors, thus strengthening the U.S. dollar (USD). Conversely, if inflation falls below 2% or unemployment rises too high, the Fed might lower rates to stimulate borrowing, which could weaken the dollar.
The Fed holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) reviews economic conditions and decides on monetary policy. Twelve officials, including seven members of the Board of Directors, the president of the New York Fed, and four other regional bank presidents, all of whom serve on a rotating basis for one-year terms, attend these meetings.
In extreme situations, the Federal Reserve may implement quantitative easing (QE), a strategy to significantly boost credit flow during financial crises or when inflation is very low. This was notably the approach during the Great Financial Crisis of 2008, involving the Fed creating more dollars to purchase high-quality bonds from financial institutions, typically weakening the U.S. dollar in the process.
Quantitative tightening (QT) is the opposite of quantitative easing. During QT, the Federal Reserve stops buying bonds and doesn’t reinvest in new bonds as old ones mature, which is usually beneficial for the value of the U.S. dollar.
