As expected, the Fed left interest rates unchanged yesterday. At the same time, Fed Chairman Jerome Powell was keen to stress that the Fed is in no hurry to cut rates. While the statement noted that the risks to both unemployment and inflation have increased, Powell also stressed in the press conference that they now need to pay attention to both variables, unlike in previous years. He deflected questions from journalists about which of the two variables the Fed needs to focus on more, citing the great uncertainty that currently prevails, Commerzbank's FX analyst Michael Pfister notes.

Powell pushes back on rate cut expectations

"Things got interesting in two places: many journalists asked whether the Fed should already be responding to the weaker soft data, rather than waiting for a slowdown in the hard data. Powell reiterated that the US real economy is in good shape, that consumers are continuing to spend and that first quarter growth looks very solid excluding distortions from imports. He also ruled out pre-emptive rate cuts as inflation remains above target. The Fed will only react when sentiment indicators are reflected in the hard data. And he did not sound at all convinced that this would happen, repeatedly pointing out that the whole situation could be resolved quite quickly. None of this sounded like rate cuts were imminent."

"Things also got exciting when it came to the elephant in the room: Donald Trump and his criticism of Powell. After insisting in response to the first question that the criticism would not affect their work, he simply blocked the second question altogether. And he was clearly at pains not to say anything that might open him up to further criticism. He only slipped out of character once, when he pointed out that the Fed has no role in advising fiscal policy on how to reduce the deficit, just as monetary policy does not seek advice from fiscal policy."

"All in all, Powell was as hawkish as expected, but still managed to give the US dollar a boost. The key question now is whether the US administration will actually be able to strike deals with other countries that will improve sentiment in the US and reduce the risk of inflation. Last night's reports of an imminent deal with the UK are certainly a good sign, but they can only be the beginning. If these deals fail to materialise, the Fed is also likely to cut rates - but until then the US dollar should continue to be supported by hawkish monetary policy."