The Fed raises its fed funds rate by 25 bps to 4.75%, and issued a more upbeat policy statement, sparking renewed rally in the dollar.
The decision has erased all of the dollar’s losses that emerged after the higher than expected increase in Germany’s IFO survey earlier today. The Fed’s hawkishness is underlined by the fact that it not only has the FOMC stayed away from acknowledging the most notable sign of economic weakness–namely new home sales showing their biggest drop in 9 years and mortgage applications hitting 3-year lows– but also issued a more upbeat view and description of the economy. The differences are illustrated below:
Mar 27-28 FOMC: The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace.
Jan 31 FOMC: Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.