USD/JPY holds firm as US Dollar stays supported after Fed keeps rates unchanged

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The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) on Wednesday, with USD/JPY consolidating gains after the Federal Reserve’s (Fed) monetary policy announcement. At the time of writing, the pair is trading around 153.92, up nearly 1% on the day.

The Fed left its benchmark interest rate unchanged at the 3.50%-3.75% range, in line with market expectations. The decision was passed by a 10-2 vote, with Fed Governors Stephen Miran and Christopher Waller dissenting in favor of a 25-basis-point rate cut.

In its accompanying statement, the Fed said that economic activity has been expanding at a solid pace, while noting that job gains have remained low and the unemployment rate is showing signs of stabilization.

Policymakers acknowledged that inflation remains somewhat elevated and stressed that uncertainty around the economic outlook remains high, reiterating that the Committee is attentive to risks on both sides of its dual mandate.

The central bank reaffirmed that future policy decisions will remain data-dependent and repeated its commitment to supporting maximum employment and returning inflation to its 2% objective.

With the decision fully priced in, the immediate market reaction has been somewhat muted. The US Dollar remains supported, with the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trading around 96.70, rebounding after slipping to four-year lows.

Traders now look ahead to Fed Chair Jerome Powell’s post-meeting press conference for clues on the future path of monetary policy, particularly on the timing and pace of any potential rate cuts.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.