Dollar steadies as Fed signals delayed rate cuts

Federal Reserve officials suggest interest rate reductions could wait, impacting the dollar and market expectations

By Ahmed Azzam | @3zzamous | 23 February 2024

Market open
  • Dollar index finds footing at 104 after recent dip.

  • Fed officials hint at later-than-expected rate cuts.

  • Inflation outlook and policy adjustments under Fed scrutiny.

The dollar index showcased stability, hovering around 104 on Friday, a notable recovery from its dip to 103.4. This movement reflects the market's digestion of remarks from Federal Reserve officials, suggesting that interest rate cuts might unfold later than previously anticipated by investors.

In a series of communications, three senior Fed officials underlined the central bank's ongoing strategy to reduce interest rates within the year, albeit not in the immediate future. Fed Vice Chair Philip Jefferson and Governor Lisa Cook shared an optimistic view on the cooling inflation despite a January uptick, emphasizing the necessity for further evidence of its sustained return to the 2% target prior to any adjustments in borrowing costs.

Cook, speaking at Princeton University, highlighted the conditional nature of policy adjustments on gaining confidence in the disinflation process's continuity and sustainability. Echoing this sentiment, Federal Reserve Governor Lisa Cook Jefferson acknowledged the likelihood of rate cuts but cautioned against excessive easing in response to transient price pressure reductions, pointing out the potential risks to long-term price stability.

Governor Christopher Waller, addressing a Minneapolis audience, argued for caution due to January’s inflation surge, advocating for a patient, deliberate approach to determining the timing for rate reductions, albeit still projecting a commencement later in the year.

These statements align with Chair Jerome Powell and other officials' views, who, while acknowledging the peak of rates, suggest a non-hurried approach towards their reduction. This stance was further supported by data released in recent weeks, showing a consumer price index rise and robust job market indicators, reinforcing a patient policy approach.

Despite earlier market bets on a March commencement for rate cuts, recent economic reports have adjusted expectations towards mid-year, reflecting a careful Fed strategy in light of inflation and employment trends. Philadelphia Fed President Patrick Harker's comments further underscored this cautious approach, open to rate reductions within the year but advising against premature expectations.