Talking Points:
- The USD dropped against all of its major counterparts after release of FOMC minutes
- Reports ‘many’ officials see hike ‘fairly soon’ if economy holds, debate on balance sheet ahead
- Mention downside risk of inflation and higher Dollar, fiscal outlook could prove a tail wind
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The US Dollar slid Wednesday afternoon following the release of the Federal Reserve’s February meeting minutes despite view from ‘many’ that next hike could come ‘fairly soon’. Although nothing in the minutes directly suggested that a March rate hike is off the table, it appears that the markets have broadly interpreted the minutes to be less hawkish than the recent speculative build up had afforded. A number of FOMC members – both voters and non-voters – have stated that they would not write off the possibility of a hike a the upcoming meeting (March 15th), which would represent a material acceleration of the 12-month gap between the last two moves.
While most Fed officials still back a gradual rate hike path, the view from a segment of the group calling for an increase ‘fairly soon’ carries either a hawkish connotation or will ultimately confuse. Among some of the restraining factors stated, a few officials believed inflation concerns would keep their votes sidelined. With certain inflation expectation measures undershooting targets, and Donald Trump’s fiscal stimulus plans remaining foggy; time may be needed for the Fed’s ‘outlook to clear’. On government policy changes, it was noted ‘some’ officials saw downside risks. Also of considerable note for FX traders, the minutes generally mentioned downside risks from further Dollar strength – perhaps the motivation to offset the modest boost to rate speculation for the currency after the release.
Another view to take note of in the minutes was the suggestion that debates over the balance sheet would begin at upcoming meetings. That would be a significant alteration to the ‘normalization’ process to this point. When the market made its assessment as to the balance of this report, the US Dollar dropped alongside bond yields in the aftermath of the release. This may suggest that the market took the outcome of today’s minutes to mean an unlikely March hike from the Fed was a lower probability than the skeptical had afforded. However, it may also reflect the same uncertainties surrounding fiscal policy and a targeting of the currency that traditionally reserved for ‘other’ central banks.
