EUR/USD slips as Fed signals only one cut in hawkish hold
- EUR/USD falls 0.21% as Fed projects just 25 bps of easing in 2026.
- SEP shows higher inflation forecasts with Core PCE revised up to 2.7%.
- Fed holds rates at 3.50%-3.75% citing resilient growth and elevated inflation.
EUR/USD drops by 0.21% on Wednesday as the Federal Reserve left interest rates unchanged, with the Board expecting just 25 basis points of easing towards the end of the year, as depicted in the Summary of Economic Projections(SEP).
Dollar firms after Fed keeps rates unchanged and trims easing outlook
The Fed’s monetary policy statement revealed that economic activity continued to expand solidly and acknowledged that the labour market is in a no-firing, no-hiring scenario and that inflation remains “somewhat elevated.” They commented that the economic outlook remains uncertain, and that “implications of developments in the Middle East for the U.S. economy are uncertain.”
Consequently, they decided to keep rates at the 3.50%-3.75% range, on an 11-to-1 vote split, with Fed Governor Stephen Miran opting for a 25-basis-point rate cut.
Summary of Economic Projections
Federal Reserve officials expect the US economy to grow 2.4% in 2026 and 2.3% the following year. The Unemployment Rate is expected to remain steady at 4.4%, while inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, is forecast at 2.7%, up from 2.4% at the December meeting.
Core PCE for the full year is projected at 2.7%, up from 2.5% in the previous SEP report. Regarding monetary policy, Fed officials expect just a quarter of a percentage point rate cut in 2026 and an additional 25 basis points in 2027.
EUR/USD reaction
The EUR/USD was muted following the Fed’s decision but remained above 1.1500 after hitting a daily low of 1.1490 earlier in the European session.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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