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Fed turns hawkish, dollar turns higher
Fed Update: June 16
A hawkish shift in the outlook for Fed policy sparked a rally for the U.S. dollar which jumped broadly to more than one-month highs.
As expected, the Fed left interest rates and its economy-boosting bond purchases at near zero and $120 billion, respectively.
The dollar capitalized on the Fed’s upgraded outlook which now projects the economy accelerating at 7% this year, compared to its previous forecast in March of 6.5%.
The Fed forecast unemployment would end the year around 4.5% which was the same as its last update.
On inflation, the Fed increased its 2021 forecast by a full percentage point to 3.4% from 2.4% in March. The Fed sees less volatile core inflation accelerating at a 3% rate, up from 2.2% in March.
The Fed’s brighter outlook for the economy led it to pull forward rate hike expectations to 2023 from 2024.
The hawkish tone of the Fed’s message today is consistent with the central bank tapering stimulus sooner rather than later. The dollar stands to benefit as markets recalibrate expectations for the Fed to reduce stimulus.
Coming dates for the Fed:
- Jul 7: Fed issues this week’s meeting minutes
- Jul 28: Next FOMC decision
- Aug 26-28: KC Fed’s Jackson Hole, Wyo. central bankers’ summit
EURUSD plunged 0.6% to 6-week lows below 1.2050
GBPUSD fell 0.3% to 1-month lows of 1.4025
USDCAD jumped 0.4% to 6-week highs above 1.2230