December 16, 2020 Virtual FOMC Press Conference. Image source: Federalreserve, flickr.com
The Federal Open Markets Committee of the Federal Reserve held its highly anticipated December meeting yesterday. As expected, the Committee refrained from changing the near-negative Federal Funds Rate, which remains at 0.25 per cent.
What was perhaps surprising to most market participants was the fact that the FOMC delivered its most hawkish-sounding statement since the beginning of the coronavirus crisis. Of course, that should not be mistaken for a hint at lifting the rate, as inflation remains markedly subdued.
"With inflation running persistently below this longerrun goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved."
Nevertheless, the FOMC refrained from scaling up its quantitative easing programs, unlike the ECB, which can be interpreted as a sign that the general economic slump in the US has already bottomed out.
The FED does not perceive a need to boost the liquidity levels as the American economy has already reached a plateau of sorts following the last major economic downturn. This, in turn, opens up the possibility for a more decisive path to recovery in 2021.
Moreover, the FOMC seems to be attempting to recalibrate its monetary policy stance so that it can address the changing tide in Washington. President-Elect Joe Biden will step in office in January, and one of his most daunting challenges would be to reduce the soaring budget deficit. In order to achieve this, the scope of FED's monetary policy needs to be capped sooner or later.
Meanwhile, the struggles of the reeling dollar were exacerbated following FOMC's decision, as the EURUSD reached a new multi-year peak. As can be seen on the hourly chart below, the underlying price action is currently trading just below the upper boundary of the ascending channel.
Despite this ostensibly bullish commitment in the market, however, a new minor correction might be due. The MACD indicator elucidates the climax of the underlying bullish momentum, whereas the price action appears to be developing an Evening Star pattern.
EURUSD 1H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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