USD/JPY plummets below 129.50 as the Fed increases rates by 50-bps as Fed Chair Powell speaks

• The USD/JPY is almost flat post-Fed 50 bps rate hike, the first in 20-years.
• The Quantitative Tightening (QT) will begin on June 1.
• On the headline, USD/JPY fluctuated around the 129.70-130.37 range.

The USD/JPY remains steady as the US Federal Reserve decided to raise rates by 50-bps while announcing the reduction of its $8.9 trillion balance sheet. At the time of writing, the USD/JPY is trading around 129.40s as traders listen to Fed Chief Jerome Powell’s press conference.

Summary of the FOMC monetary policy statement

The US central bank stated that inflation is “expected to return to its 2% objective and the labor market to remain strong with appropriate monetary policy firming.” However, the FOMC stated that high prices reflect supply and demand imbalances are related to the Covid-19 pandemic. The Fed reiterated that it would remain “attentive to inflation risks.”

The committee acknowledged the negative print in Q1’s GDP and said that “household spending and business fixed investment remained strong.”

Concerning geopolitics, particularly the Ukraine-Russia war, the US central bank stated that “implications for US economy highly uncertain but in the near term invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.” Furthermore, they added that the war is “causing tremendous human and economic hardship.”

Regarding the balance sheet reduction, the Fed said it would begin on June 1. The central bank will initially cap US Treasuries by $30 billion per month. Regarding agency debt and mortgage-backed securities (MBS), the Fed will reduce it by $17.5 billion per month. In both cases, the cap will be lifted after three months, as US Treasuries reduction will hit $60 billion, while the MBS cap will increase to $30 billion.

USD/JPY Reaction to the headline

The USD/JPY initially reacted downwards, as the decision was seen as a “buy the rumor, sell the fact” event and printed a daily low of around 129.73. Nonetheless, once market participants digested the Fed monetary policy statement, the USD/JPY jumped towards daily highs above 130.30s until settling around current levels, as Fed Chair Jerome Powell took the stand.

Federal Reserve Chairman Jerome Powell Press conference: here