The Federal Reserve is preparing for significant discussions in its upcoming October meeting, with hopes of gathering essential economic data. A recent heat map showing the percentage changes of all major currencies is a good reminder of how the dollar has performed against its peers. The Federal Reserve’s chair is aware that there has been a shift in risk dynamics. Now, the economy faces even greater downside risks than it did a week ago.
As seen in the heat map, major currencies have had historic moves against the U.S. dollar. The dollar is down a slight 0.14% against the euro today. It has dropped 0.32% on the British pound and 0.24% against the Japanese yen. In the meantime, it’s been up a little by 0.01% on the Canadian dollar and 0.04% on the New Zealand dollar. The dollar has dropped more vis a vis the Australian dollar, a whopping -0.42%.
The Federal Reserve to their credit has signaled strong and clear that they will not deviate from their current dour outlook. That will occur only if critical economic data cannot be provided in advance of the October meeting. This unpredictability is almost ironic, as the central bank expects a lot of disinflation from the housing sector in coming months. These sorts of expectations are very important as they may help shape subsequent policy changes.
Additionally, the Fed has signaled an understanding that the current economic environment requires a quicker shift to a neutral policy posture. Unfortunately, the recent changes in risk factors make this urgency more acute. As part of this expected transition, two additional interest rate cuts this year seem plausible, growing more likely by the day according to market analysts.
The lesson is that the central bank needs to stick to its inflation target. It assumes that headline PCE inflation will get back down to 2% in roughly a year and a half. This objective highlights the Fed’s forward-lookingness in battling structural economic challenges presented by changing market scenarios.