Just one word could determine how the US dollar trades in the months ahead

Justin Sullivan/Getty ImagesJustin Sullivan/Getty Images
  • The US Federal Reserve is widely expected to hike official interest rates at its September FOMC meeting.
  • Macquarie Bank says one word in the post-meeting statement could determine how the US dollar fares in the months ahead.
  • Updated economic and interest rate forecasts from the Fed, as well as Chair Jerome Powell’s press conference, will also dictate market movements rather than the actual rate decision.

When the US Federal Reserve announces its September interest rate decision on Wednesday afternoon (Thursday, 4am, Sydney time), it won’t be the actual rate decision, nor the updated economic projections offered by individual FOMC members, that will be of most interest to Gareth Berry and Thierry Wizman, FX and Rates Strategists at Macquarie Bank.

In their opinion, it’s the statement that will be of most interest to traders, particularly one word, that will dictate how the US dollar will perform in the months ahead.


“With a hike fully priced in, the market reaction could hinge on whether policy settings are still described as ‘accommodative’ afterwards,” they say.

When the FOMC last met in early August, the post-meeting statement noted that “the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2% inflation”.

That implies that even after seven 25 basis point rate hikes, leaving the Funds rate in a range between 1.75% to 2%, policy settings were still seen to be stimulatory to the US economy, rather than being neutral or restrictive, maintaining the view offered since the Fed first hiked rate in this cycle back in late 2015.

Should that word be removed, implying that settings are now neutral, Berry and Wizman say it could weigh on the US dollar as doubts creep in as to just how much more the Fed will tighten policy.

“Dropping that key phrase would suggest neutral policy settings are coming into view, which could be interpreted as a dovish development,” they say.

Given a quarter-point increase in the funds rate is deemed to be a near-given at this meeting, the description on current policy settings, along with the latest dot plot on individual FOMC member year-end forecasts for the funds rate and press conference from Fed Chair Jerome Powell, will likely hold the key as to how broader financial markets perform in the short-to-medium term.

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