The US dollar is narrowly mixed after selling off following the FOMC statement. Sometimes the narrative explains the price action, and sometimes the price action explains the narrative. This seems to be the case of the latter. The dollar and interest rates fell, and so the Fed was dovish.
First, let’s turn to the fall interest rates. At the end of last week, the two-year note yields 1.34%. It rose slightly at the start of the week and fell slightly yesterday. It sits at 1.35% now. The December Fed funds futures contract finished last week with an implied yields of 1.225%. It had risen to 1.24% on Tuesday, but finished yesterday at 1.225%. This shows that expectations for the trajectory of Fed policy have not changed. The 10-year yield, which has less directly to do with Fed policy, is five basis points higher this week.
Second, consider that the dovish read of the consensus narrative was based the changed characterization of the current situation not in the forward looking section. The FOMC statement said that inflation was “below target” (not “persistently” as some press accounts characterized it) as opposed to the previous statement in June that said,”somewhat below target. “The FOMC did not change its assessment that inflation would move toward its target in the medium term.
Third, consider the inflation data that have been released since the mid-June meeting. There was the May PCE deflator released at the end of June. As was seen with the May CPI, which was released a few hours before the June FOMC meeting concluded, the core PCE deflator eased for the fourth consecutive month. There was the June CPI in mid-July. The headline rates eased to 1.6% from 1.9%, but the core rate was unchanged at 1.7%. This is to say that there has been limited high frequency price data over the past six weeks, which is also to limit the significance we attach to the word “somewhat” in the economic description.
