US Dollar Muted Following Minutes from January FOMC Meeting
- Fed officials see increased global downside risk
- US housing, labor indicators still signal strength
- FOMC maintains rates policy is data-dependent
In the most recent FOMC minutes, multiple members saw increased downside risk and uncertainty regarding the inflation outlook and global growth. These worries can be accredited to the continuing decline in global equities, as well as low energy prices.
Lower energy prices are bringing up questions of economic stability for a number of countries and the potential harm to global growth that turmoil there could entail. Along with energy prices, countries like Japan and China continue to be seen as stability risks. Thus the risk from global markets remains an important factor for the Fed to consider as it decides the direction of future policy.
However, despite the more cautious outlook, domestic growth indicators provided some confidence at the January meeting. Areas such as housing, job growth and labor utilization showed signs of continued strength. These economic growth indicators are key gauges that the Fed as it considers the pace of its rate hike path. The importance of these measures to the Fed does not necessarily translate equally to the marketshowever.
One of the most important indicators for the Fed is inflation, and the meeting minutes release stressed the effect that low energy prices are having on headline price growth. Despite this, medium term inflation expectations were little changed and the Fed is confident of its ability to foster inflation growth to reach its 2% target. The core inflation rate is currently at 2.1 percent. However, the Fed’s preferred core PCE measure is markedly lower at 1.4.
With regards to future rate hikes, the committee maintained its cautious outlook and affirmed that it remains data-dependent. For their part, the markets no longer expect policymakers to tighten further in 2016, according to the priced-in outlook implied in Fed Funds futures contracts. Today’s release did not offer clear-cut push back against this consensus view, which perhaps explains why the US Dollar did not react in a meaningful way.
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