FOMC Sticks to Script, Dollar Pushed Lower

The US dollar has fallen in the aftermath of the unsurprising FOMC statement.  The dollar was sold toward session lows against most of the major currencies.  It appeared that expectations a more hawkish statement discouraged position adjustment ahead of the statement.  At the same time, there was little in the statement that suggested that a change in the economic projections toward the median being for three more hikes this year was imminent.  

The observation that growth had strengthened was tweaked in light of the slower Q1 GDP.  However, the statement also upgraded capital investment.  The statement recognized that inflation had approached the Fed's 2% target, but there was no indication that it was accelerating.  It also inserted twice the word symmetrical in the statement, indicating that it will not let inflation run above target just because it had previously run below target.  

Seeing the dollar and US rates soften, some will read the Fed statement dovishly.  We do not see any reason to re-think the likelihood of a June and September hike.  The effective Fed funds rate has been trading on the firm side and has been averaging 1.70% for the last several days.  A 25 bp rate hike in June would put fair value of the July contract near 1.95% (1.70% + 25 bp).  It is currently implying a yield of 1.935%.  

Another hike in September would put fair value of the October contract near 2.20% (1.95%+ 25 bp).  The price of the October contract currently implies a 2.125% yield.  A hike in December would bring the effective rate to around 2.45%.  The January 2018 contract implies 2.265%.  This suggests that there is some more room to price in Fed tightening two or three more times this year.  

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