The Fed to Leave Rates Where They Are

The Federal Open Market Committee’s (FOMC) post-meeting statement on monetary policy is fairly straightforward by Fed standards. It believes that the appropriate stance on policy is to keep interest rates unchanged for the time being.

During a press conference following the statement’s release, Federal Reserve Chair Jerome Powell addressed questions by stating that there is little evidence suggesting the need to adjust interest rates from their current level, either upward or downward.

While the U.S. Central Bank’s less dovish stance may be unsurprising given the ongoing strength of the job market and inflation concerns, this could signal potential challenges for multinational companies in the future.

The U.S. Dollar’s Link to Interest Rates

As U.S. interest rates have climbed, overseas investors have been purchasing U.S. dollars to invest in U.S. fixed-income markets. This increased demand for the U.S. currency has led to an increase in its value. For instance, the US Dollar Index (DXY) is up 4% so far this year and nearing a 12-month high.

Elevated interest rates will likely extend the dollar’s recent reign. This could be problematic for U.S. companies whose profits are closely tied to exports.

Headwinds for Multinationals

A stronger dollar makes it more expensive for foreign customers to buy U.S. goods. This can lead to reduced sales and profit margins for multinational corporations, particularly those with a large overseas footprint.

Megan Horneman, chief investment officer at Verdence Capital Advisors, highlights this concern in a recent Barron’s article, “A strong dollar… is a headwind for multinational companies for earnings.”

Horneman is concerned that the elevated U.S. dollar and the delay in Fed cuts have not yet been factored into earnings estimates for 2024 or 2025. If the market is still working with an old, less-strong dollar, disappointment may lie ahead.

Key Takeaway

The Federal Reserve’s less dovish stance is likely to continue to strengthen the dollar, which could impact the profits of U.S. multinational companies. Increased competition from producers with weaker native currencies could cause profits to shrink.