EUR/USD holds near 1.1670 as Fed leaves rates unchanged now

Fed’s monetary policy statement

In its monetary policy statement, the Fed revealed that the economy remains solid and that the unemployment rate “has been little changed in recent months.” The central bank acknowledged that inflation is elevated, reflecting high energy prices spurred by the Iran war.

The FOMC stated that “Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook,” and that they would be considering both sides of the mandate.

Regarding the vote split, it was 8 to 4, with Fed Governor Stephen Miran opting for a rate cut. In contrast, Beth Hammack, Neel Kashkari and Lorie Logan voted against including an easing bias in the statement at this time.

Now the markets brace for the Fed Chair Jerome Powell’s monetary policy meeting at 18:30 GMT.

EUR/USD reaction to the Fed’s decision

The EUR/USD drops below 1.1680 as the statement is perceived as slightly hawkish, with three FOMC members voting against the inclusion of an easing bias.

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.