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The FOMC Drives Key Global Foreign Exchange Indicators

PART:
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The FOMC Drives Key Global Foreign Exchange Indicators PART 1 OF 4

The FOMC Baffles Markets with a Hawkish Stance on Rate Liftoff

FOMC delivers a shocker

The US dollar index rose by almost 1% on October 28, 2015, following the FOMC (Federal Open Market Committee) meeting. The Fed kept rates unchanged at 0%–0.25% but released a hawkish statement regarding the timing of the hike in interest rates in December. The Fed sent out a strong signal of a possible interest rate hike in December if reported data show strength in the economy.

The FOMC Baffles Markets with a Hawkish Stance on Rate Liftoff

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The Fed was expected to maintain a dovish stance on the rate hike amid the economic slowdown, which has caused low demand and weak commodity and crude prices, thus hurting inflation levels. The macroeconomic data since the last policy statement in September have portrayed sluggish growth across key segments. World currencies depreciated against the US dollar as market participants were expecting the liftoff to be delayed.

Liftoff dependent on employment and inflation growth

Fed chairperson Janet Yellen indicated that the US economy was growing despite the global turmoil affecting global markets. FOMC members voted 9 to 1 in favor of the policy action to keep rates unchanged in the October meeting, while Jeffrey M. Lacker voted for a hike in policy rates by 25 basis points. The Fed will assess the progress in the labor sector through employment generated and the trajectory of inflation toward its target of 2% in the December FOMC meeting before making the call to raise interest rates.

Impact on the market

The SPDR S&P 500 ETF (SPY) rose by 1.1% on October 28, 2015, after the bullish trend in the markets following the FOMC meeting. Also, the SPDR S&P Homebuilders ETF (XHB) rose by 1.8%.

Among the major stocks, Wells Fargo & Company (WFC) rose by 2.5% on the day. Among other banks, Bank of America (BAC) and Bank of New York Mellon (BK) rose by 5.4% and 3.3%, respectively.

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