FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that yesterday’s FOMC statement was broadly in line with market expectations displaying a more cautious tone. Key Quotes “It has provided just enough encouragement to extend relief rallies in commodity and emerging market currencies. The Fed acknowledged that it is “closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook”. It buys the Fed more time to weigh up the outlook for monetary policy. At the current juncture, the Fed is unlikely to be overly concerned by recent developments to such an extent that they significantly alter their outlook for monetary policy. The likelihood of a further rate hike at their next meeting in March has declined but still remains a possibility. The statement reiterated that the Fed expects that economic conditions will warrant only gradual increases in the Fed funds rate. The gradual pace of tightening expected by the Fed is likely still faster than the one rate hike currently discounted by the market for this year. The ongoing tightening of US labour market conditions continues to support the Fed’s outlook for further monetary tightening. The statement acknowledged that labour market conditions have improved further and that recent labour market indicators point to some additional decline in the underutilisation of labour resources. It underpins the Fed’s judgement that inflation will rise to 2% over the medium-term as the transitory effects of declines in energy and import prices dissipate. However, the Fed refrained from repeating that the risks to the outlook are balanced as it continues to weigh up the implications from recent global economic and financial developments. The further decline in the price of crude oil is expected to keep inflation low in the near-term. The Fed also acknowledged that market-based measures of inflation compensation have declined further, but that survey-based measures of longer-term inflation expectations have remained stable. The Fed’s description of the US economy was softened as well acknowledging that household spending and business investment have been increasing at a more moderate rate in recent months, and that the inventory investment has slowed. A potential signal that the inventories drag will be larger than expected in Q4? However, we doubt that the Fed has materially downgraded its outlook for economic growth this year and likely views the recent softening as more temporary. Overall the outlook for Fed policy will remain dependent on incoming economic data and financial developments. On balance we are more confident that the incoming economic data will provide justification for the Fed to tighten policy further this year. In contrast, we are less confident that financial market developments will prove as supportive. Still the US dollar is likely to outperform most other currencies perhaps with the exception of the yen and possibly the euro even if financial market developments deteriorated further prompting the Fed to dampen tightening expectations.” For more information, read our latest forex news.