End of “Accommodative” Monetary Policy Sparks US Dollar Volatility

The Federal Reserve raised the upper level of US interest rates to 2.25 percent on Wednesday, as widely expected, while also dropping longstanding terminology from its statement relating to the “accommodative” level of monetary policy. The dollar was volatile as a result.

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US monetary policy no longer “remains accommodative,” per the latest statement from the Federal Reserve, indicating that there is now less room for US interest rates to rise. Rates were raised on Wednesday to a ten-year high of 2.25 percent and the Fed foresees another rate hike in December and three more next year.

The removal of “accommodative” signalled to many in the market a dovish turn, which meant a sharp fall for the US dollar and gains for riskier assets, at least initially. Two hours following the Fed’s announcements, the majority of market moves had been reversed.

The Australian dollar was among the initial beneficiaries as it spiked more than half a cent upon the language change to $0.7315. At the time of writing, it was back fetching $0.7260.

The euro spiked one-third of a cent, coming within a whisker of $1.18, but quickly fell back and was lower against the dollar as the Asian session approached, within the mid-$1.17s.

The dollar remained down versus the Japanese yen, however. During a volatile evening the greenback traded briefly at a two-month high of ¥113.13 but had fallen by 4:30pm in New York to ¥112.70.

Like the Australian dollar, emerging markets initially gained but for the most part fell back to their Wednesday evening starting positions. The South African rand couldn’t make up its mind; it initially climbed 0.6 percent versus the US dollar, then weakened by 1.1 percent, before springing back at the beginning of the Asian session to R14.14, slightly higher than its pre-Fed level.

Elsewhere, the Fed raised its expectations for economic growth for this year and next, which likely offset changes to the statement’s language.

The Fed is predicting faster-than-expected economic growth of 3.1 percent this year, with moderate expansion for at least three more years, against a backdrop of low unemployment. Inflation, it is believed, will remain close to the Fed’s 2 percent target.


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