FOMC Cuts, Outlook Unclear

The dollar was mixed following the FOMC’s announcement to cut rates by 25-basis points to 2.0%. The Fed reiterated that economic activity remains weak, while “household and business spending has been subdued and labor markets have softened further”. The Fed expects lingering tight credit conditions and the “deepening housing contraction” to weigh on growth over the coming quarters. Nonetheless, the statement did not give a clear indication of whether the Fed would continue easing policy over the coming months. The FOMC said that uncertainty about the inflation outlook remains high, but does expect it to moderate in the coming quarters. While it was unclear from the policy statement, we anticipate the Fed will leave interest rates unchanged for the remainder of the year.

Economic data from the US earlier in the session was better than expected, with the advanced reading of Q1 GDP unchanged at 0.6% -- beating out calls for a drop to 0.2%. The Q1 core PCE prices declined to 2.2% from 2.5%, while GDP sales posted a 0.2% drop versus a 2.4% increase in the previous quarter. The April ADP private sector payrolls number also reported better than forecast, posting a 10k increase, compared with estimates for a 60k decline and improving slightly from 8k in March. The April Chicago PMI survey improved from March, rising to 48.3 from 48.2.