Investors and traders use the Federal Reserve’s forward guidance about future monetary policy for their trading strategies, as it influences forex markets today. In the aftermath of the 2008 Global Financial Crisis, for example, the Fed used forward guidance to support economic activity and a return of inflation to 2.0%. The list that follows summarizes several examples of the FOMC’s guidance about the future path of the federal funds rate, as communicated through its postmeeting statements. For each example, we write how the statement should be read by traders (dovish or hawkish tone) and the effects on the EURUSD exchange rates. It is a good exercise to learn how to trade the forward guidance in a profitable way.
October 29, 2014: The FOMC states that “it likely will be appropriate to maintain the 0 to 1/4% target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2,0% longer-run goal, and provided that longer-term inflation expectations remain well anchored.” The conditional nature of this period is emphasized: “However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.” Hawkish, EURUSD falls, ceteris paribus.
December 16, 2015: The FOMC raises the target range for the first time since before the financial crisis. The FOMC indicates that “the stance of monetary policy remains accommodative after this increase.” The FOMC expects that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” The FOMC also states that it anticipates that it would maintain its reinvestment policy “until normalization of the level of the federal funds rate is well under way.” Dovish, EURUSD rises, ceteris paribus.
March 15, 2017: The mention of “only gradual increases” in the future path of the federal funds rate is changed to “gradual increases.” Also, the statement now emphasizes the Committee’s “symmetric inflation goal” instead of its “inflation goal.” Hawkish, EURUSD falls, ceteris paribus.
June 13, 2018: The FOMC drops the sentence indicating that the federal funds rate is “likely to remain, for some time, below levels that are expected to prevail in the longer run.” Hawkish, EURUSD falls, ceteris paribus.
September 26, 2018: The FOMC drops a sentence indicating that “the stance of monetary policy remains accommodative,” which had been in place since December 2015. Hawkish, EURUSD falls, ceteris paribus.