• The USD/CAD tumbled 80 pips on the release of the Fed’s decision.
• Fed officials will consider previous rate hikes increases, acknowledging that it would take some time to broaden the effects of monetary policy.
• Fed’s Powell: Officials project that the Federal funds rate (FFR) would peak at higher levels than estimated in September.

The USD/CAD plummets after the Federal Reserve hiked rates by 75 bps. However, it was dovish tilted, as officials said that they would take into account “the cumulative tightening of monetary policy” and acknowledge that the effects of policy affect economic activity and inflation. At the time of writing, the USD/CAD is trading at around 1.3550s, amid volatile conditions, after the FOMC’s decision.

Federal Reserve summary of the monetary policy statement

In its monetary policy statement, the Fed acknowledged that growth was slowing down in spending and production and commented that labor market conditions remain “robust” and the unemployment rate is slow. Policymakers added that inflation remains elevated, a reflection of the supply/demand imbalances blamed on the pandemic and higher food and energy prices.

Even though Fed policymakers mentioned that they are resolute in taming inflation and will continue to tighten monetary conditions, they laid the ground for a slower pace of interest-rate increases. Fed officials added to the statement, “the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” which initially is perceived as they acknowledge that monetary policy is not reacting as fast as expected, and would take into account that.

Concerning the Fed’s balance sheet reduction, policymakers added that it would keep reducing as expected and added that the Federal Reserve Open Market Committee (FOMC) would be data-dependent, taking into account public health readings, labor market conditions, inflation pressures, and inflation expectations.

USD/CAD Market’s reaction

The USD/CAD dived from around 1.3630 toward 1.3560, hitting a daily low of 1.3548. However, Federal Reserve Chair Jerome Powell said they would continue tightening monetary conditions; the USD/CAD erased some of its gains and is back at around 1.3600.

USD/CAD 5-minute chart