US Dollar Seesaws After FOMC Minutes, June Hike Still Likely

Talking Points:

• FOMC statement references rate hikes and balance sheet adjustment, but lacks certainty
• June hike still likely with officials stating tightening appropriate ‘soon’
• Almost all Fed officials favor starting to shrink balance sheet in 2017

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The US Dollar failed to find a directional break after the release of May’s FOMC minutes, possibly indicating a slight disappointment to the lack of certainty to the policy pace. After the Fed wrote off the slowing of United States GDP in the first quarter as ‘transitory’, the market seemed to feel fairly confident about the possibility of a June hike. Today’s statement however cooled that confidence with no definitive preference for timing at the next meeting versus gatherings in the second half of the year.

While most Fed officials still state that they feel tightening is likely “appropriate” soon, it was stated that FOMC voters thought it prudent to await evidence that the recent economic slowdown is in fact transitory. These statements could be viewed as slightly more dovish, yet CME Fedwatch is still showing the current probability for a June rate-hike at 83.1 percent. That is slightly higher than it was prior to today’s release

The next major phase of monetary policy tightening - the timing and approach to the unwinding of the Fed’s balance sheet (also referred to as altering the ‘reinvestment’ policy) - has been of high interest to the market and was also touched upon in the statement. Almost all Fed officials now favor starting to shrink the balance sheet this year. The staff outline plan for the gradual phase-out of reinvestments was included in the transcript. It proposes raising the amount their limit for roll-off every 3 months. In a statement yesterday, Philadelphia Fed President Patrick Harker said unwinding the balance sheet will be “predictable, slow, and as boring as possible.”