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FOMC Meeting minutes – Odds for a June rate hike increases

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FOMC Meeting Minutes – What you should know

  • The US Federal Reserve released the meeting minutes from the May 2nd – 3rd monetary policy meeting where interest rates were left unchanged
  • Fed officials were rather mixed but the overwhelming consensus was that a rate hike was needed
  • The US central bank is also building up expectations that it will begin to unwind its $4.5 trillion balance sheet
  • The CME Futures Fed funds probability tool showed the odds of a rate hike rising to 83%, up from just 60% a week before

FOMC Meeting Minutes Summary

The FOMC meeting minutes that were released yesterday from the May 2nd – 3rd meeting failed to boost the prospects of a stronger dollar as the US dollar slipped after the meeting minutes was released.

The US dollar index extended the declines from Tuesday and continued trading near the 6-month lows that were formed earlier this week.

The meeting minutes showed that overall, policymakers judged that it would be prudent to wait for more evidence that indicates a slowdown in the pace of economic activity before tightening monetary policy further.

Fed officials mixed on the US economic outlook

In the meeting minutes, the Fed officials expected that interest rates will continue to rise although the US economy looked to have weakened in the first quarter. However, some officials expressed concerns that the weakness in the economy came from both inflation and economic growth, warranting a more cautious approach.

The weakness in the US dollar was attributed to a dovish tone from the minutes as investors expected to see a more confident signal on the rate hikes. After the meeting in May, the markets had priced in a probability of a rate hike in June.

The divisions within the FOMC members continued with some looking past the recent trend of weak economic growth while others expressing concerns on the slowdown in inflation. Members argued that if wages rose quicker and if there was any significant fiscal stimulus plan put forth by President Trump, the pace of rate hike could quicken.

Other officials were, however, skeptical noting that there was still a significant amount of slack in the US labor market.

Fed to begin unwinding the balance sheet

The FOMC meeting minutes also stressed on the plans to cut down in its securities holdings which amount to approximately $4.5 trillion in Treasury and Mortgage securities. Fed officials said that they expect to gradually unwind its balance sheet by allowing to increase the amounts of these securities to mature instead of re-investing.

The meeting minutes showed that the Fed will raise caps every three months which will begin to lift the limits on a number of assets that will mature. Fed officials said that the approach to unwinding the balance sheet will be gradual and predictable. There were, however, no numbers attached to show the pace of the unwinding of the balance sheet.

The markets, however, expect to see more clarity from the Fed on the balance sheet and how the central bank plans to go about doing it.

The fact that the Fed officials spoke about unwinding the Fed’s securities holdings instead of a direct reference to rate hike was seen as one of the factors that led to a weaker US dollar.

CME Group: Fed rate hike probability for June 2017 - 83%
CME Group: Fed rate hike probability for June 2017 – 83%

According to the CME Group, the Fed Funds futures rate hike probability tool rose to 83% by Wednesday’s close. The probability was around 60% just a week before. Higher interest rates are seen to be more attractive to yield-seeking investors.

The Fed is currently expected to deliver two more rate hikes this year and the market probability for two rate hikes stands at 46%.

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