For the third meeting in a row, the Federal Reserve left interest rates unchanged at 5.25 percent. This decision was fully priced into the market and not what traders were sitting on the edges of their seat waiting for. Instead, everyone was focused on the FOMC statement and wanted to see the Fed put their concerns about core price inflation on paper. Unfortunately the statement did not deliver what the market was looking for as it remained virtually unchanged expect for two things.
The Fed added the line "Going forward the economy seems likely to expand at a moderate pace." and deleted the reference to commodity prices contributing to the high level of resource utilization. Aside from that, they did not change their stance on inflation. The lack of more hawkish comments has disappointed traders as they send the US dollar and yields lower, resurrecting the possibility of a rate cut early next year. However, even though the comments on inflation did not change much, we want to point out that the statement is still slightly more positive than the last, thanks to the more optimistic take on growth. The take away is - Do not expect the Fed to change rates again any time soon and the knee jerk reaction is more a reflection of reversals on trades by speculators who were looking for more from the Fed. For the time being, 1.25 and 120 will still hold in the EUR/USD and USD/JPY and we expect more dollar bulls to begin to move to the sidelines.
