• Fed’s rate hold and outlook shift spark NZD/USD volatility.
• Powell’s remarks indicate measured rate hikes to tackle inflation.
• Revised Fed predictions: 5.6% FFR peak, 1% growth in 2023, and 4.1% unemployment.

NZD/USD trades volatile on Wednesday after the US Federal Reserve (Fed) decided to keep the Federal Funds Rates (FFR) unchanged but upward revises its peak, which spurred a drop in the NZD/USD from around 0.6230 to 0.6170. Nevertheless, as Fed Chair Powell took the stance, it gave the green light to NZD buyers to re-enter fresh longs. The NZD/USD trades around the 0.6200-0.6220 range amidst a  volatile session.

Federal Reserve’s hawkish hold rocks the NZD/USD

During his press conference, Fed Chair Jerome Pöwell commented that reducing inflation would require growth below trend and that decisions would be taken meeting by meeting. He said Fed’s July decision would be live and added the upward revision of the dot plot is consistent with where it was before the banking turmoil In March.

When asked why not hiking instead of pausing, Powell said the “question of speed on rate hikes is separate from the question of the level of rates.” He added the Fed is not that far from reaching peak rates, adding the need to adjust the pace slower.

Powell stressed the FOMC is “completely unified” to curb inflation to its 2% target and discounted rate cuts in 2023, adding that “it will be appropriate to cut rates when inflation comes down.”

The Fed’s statement highlights the labor market’s robustness, pointing out that the unemployment rate remains low but stresses that inflation is elevated and warning that tight market conditions could negatively impact economic activity. Given those conditions, the Fed kept rates unchanged, pausing its tightening cycle, but upward revised the FFR peak, as showcased by the dot plot in the Summary of Economic Projections (SEP).

The dot plot showed that most officials expect the Federal Funds Rates (FFR) to peak at 5.6% by the year-s end, up from March’s 5.1%. Additionally, policymakers have adjusted their forecast for growth in 2023, now predicting it to be 1%, a notable increase from their March prediction of 0.4%. They also reviewed the unemployment rate, lowering it from 4.5% to 4.1%. As for inflation, the Core PCE, the Fed’s favored measurement, is now predicted to hit 3.9%, up from the 3.6% estimated in March. However, the overall PCE has been slightly revised to 3.2% from 3.3%.