- USD/JPY fell in response to the Fed's 50bps rate cut but has since recovered.
- The dot plot for the Fed's interest rate outlook also fell.
- Fed Chairman Powell eased initial market fears at a press conference.
The US dollar fell to $140.80 against the Japanese yen on Wednesday after the Federal Reserve announced a 50 basis point interest rate cut. This was the Fed's first rate cut in four years, and the US central bank's policymakers are scrambling to keep up with market expectations. Investors had initially expected the Fed to make its first rate cut in March.
The Federal Reserve's dot plot, part of the Federal Open Market Committee's (FOMC) Economic Outlook Overview, has been revised downward from the central bank's previous interest rate outlook. The median Fed policy forecast now projects the federal funds rate to fall to 4.4% by the end of 2024 and 3.4% by the end of 2025, from 5.1% and 4.1%, respectively.
Digging into the Fed's announcement, Fed policymakers now expect U.S. gross domestic product (GDP) growth to stay at 2.0% through 2024, down from their previous forecast of 2.1% in June. Fed officials also expect the U.S. unemployment rate to stabilize at around 4.4% by the end of 2024.
Federal Reserve Chairman Jerome Powell sought to calm markets during a press conference following the Fed's dramatic 50 basis point interest rate cut. The Chairman emphasized that the Fed will remain cautious and wait for economic data to be released before making any further decisions on rate cuts. Chairman Powell's cautious explanation of the Fed's policy adjustments helped keep markets stable. Interest rate markets are currently indicating a 65% chance that no further action will be taken at the Federal Open Market Committee's next interest rate decision on November 7th.
USD/JPY Price Prediction
USD/JPY initially slumped towards 140.40 after the Fed cut its key benchmark interest rate on Wednesday, but the market quickly regained balance, with the USD/JPY pair returning to this week's highs near 142.50. The pair is currently trading in a familiar technical zone and is at risk of falling into a consolidation trap that could squeeze both buyers and sellers in a narrow but volatile range.
USD/JPY daily chart
Federal Reserve FAQs
Monetary policy in the United States is set by the Federal Reserve (FRB), which has two mandates: to promote price stability and full employment. Its primary tool for achieving these goals is adjusting interest rates. When prices rise sharply and inflation exceeds the Fed's 2% target, the Fed raises interest rates, increasing borrowing costs across the economy. As a result, the United States becomes an attractive place for international investors to park their funds, strengthening the US Dollar (USD). When inflation falls below 2% or unemployment is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the USD.
The Federal Reserve Board (FRB) meets eight times a year, where the Federal Open Market Committee (FOMC) assesses the state of the economy and sets monetary policy. The FOMC is attended by 12 Fed officials: the seven members of the Federal Reserve Board, the President of the Federal Reserve Bank of New York, and four of the remaining 11 regional reserve bank presidents. These presidents serve rotating one-year terms.
In extreme circumstances, the Federal Reserve may resort to a policy known as quantitative easing (QE). QE is a process in which the Federal Reserve dramatically increases the flow of credit in a distressed financial system. It is a non-standard policy tool used during crises or when inflation is extremely low. It was the tool of choice for the Federal Reserve during the 2008 financial crisis. This means that the Federal Reserve prints more dollar bills and uses them to buy higher-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of QE, where the Fed stops buying bonds from financial institutions, reinvesting the principal of maturing bonds and not buying new bonds, which is usually positive for the value of the US dollar.
