Three reasons for a further surge in the dollar after the Fed

• The “dot-plot” is pointing to no more cuts through 2020.
• Despite the cut, the accompanying statement remains balanced.
• The high number of dissents shows the Fed’s independence.

The Federal Reserve has cut interest rates by 25 basis points as expected – follow all updates in the live coverage.

Lower rates tend to weigh on the currency – but the dollar advanced. While this may be attributed to a typical “buy the rumor, sell the fact” phenomenon, there are more significant factors.

1) No more cuts

The Federal Reserve’s dot plot signals no additional cuts in 2019. There were 10 members placing their dots at current rates or higher, easily beating seven doves who see further reductions.

Moreover, the forecasts are pointing to no further rate cuts in 2020, with a closer 9:8 split.

The Fed may change its mind, but is currently indicating that is done. The US interest rate is high in comparison to other developed economies – allowing the dollar more room to run.

2) Divided Fed

The split in the dots has also been reflected in the voting pattern. No fewer than three members voted against the decision. Eric Rosengren, President of the Boston branch of the Federal Reserve, and his counterpart from Cleveland Esther George repeated their objection to the cut. On the other side of the fence, James Bullard of the Saint Louis Fed has voted for a double dose of cuts – 50 basis points.

These dissents show that members of the Fed are fiercely independent and speak their mind according to their opinions. For President Donald Trump – who immediately criticized the Fed’s decision – this independence means FOMC members will not succumb to any pressures. The hawks will likely hold their ground and keep rates higher.

3) No change in the statement

The accompanying statement has included minor changes in comparison to the previous one in July. The Fed upgraded its description of the consumption and downgraded its wording about investment. The changes serve as an acknowledgment of recent developments rather than earth-shattering news.

That also implies that no new changes are projected and support the notion of a hawkish cut.

Conclusion – more dollar gains?

The Fed’s intentions to keep rates unchanged, as seen by the dot-plot, divisions, and the statement. Markets’ disappointment has weighed on the dollar, but more gains for the greenback are likely as analysts digest all the developments.