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Fed minutes reveal no set path for rate hikes

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The FOMC meeting minutes from January, released yesterday did not come with any surprises as the market expectations were tightly tuned into seeing dovish minutes. As expected, Fed members express concerns that the economic uncertainty had increased, exposing downside risks to the US economic growth. Fed members were also starting to worry about inflation which has remained consistently below the Fed’s 2.0% target range.

In line with Ms. Yellen’s testimony to the US Congress last week, the Fed minutes revealed the further rate hikes would remain data dependent. US labor markets outlook was also met with skepticism as members were divided between more hawkish growth expectations in the US labor markets while some members believed that there could be a slowdown in hiring.

With the minutes coming out dovish as expected, there were no major reactions. While the US Dollar briefly slipped after the minutes were released, most of the USD crosses managed to trim their losses as the Greenback stabilized.

[Tweet “US Dollar slipped after the minutes were released, most of the USD crosses managed to trim losses “]

EURUSD closed yesterday with modest losses at 1.1127, while USDJPY which slipped earlier in the day, managed to close almost flat at 114.07 Yen.

The Federal Reserve, in December last year expected to hike rates four times in 2016, but with the global markets turning lower since the start of January combined with weak economic growth in the US, speculators are pushing back bets that the Fed could at most hike rates twice this year.

The US Dollar index closed yesterday’s session with a doji candlestick pattern following nearly three straight days of gains. A lower close today could potentially see a downside correction with a possible test to 95.8 which if holds, could see further short-term rally towards the 98.0 – 98.5 levels of resistance.

However, price action is likely to remain limited ahead of tomorrow’s inflation data. The only other major economic release that could impact the US Dollar fundamentally is the second revised estimates of the fourth quarter GDP which is due on 26th February, which as of the preliminary release saw the Q4 GDP expanding 0.70%.

Highlights from the FOMC meeting minutes

  • Fed members saw an increased downside risk to the US and global economy, including inflation stemming from lower Oil prices and weakness global economic growth
  • Further assessment of the impact of tighter monetary conditions is required in the medium term
  • Fed members were concerned about US consumer spending, as they believed that consumer spending was not in line with the increase in wages. Fed members were, however, hopeful of a rebound in consumer spending over a period of time
  • Fed members expect inflation to pick up after the impact of lower oil prices and stronger Dollar dissipate
  • The drop in equity prices was seen as a correction, which is in line with equity valuations
  • Policy makers reiterated that monetary policy adjustments would be data dependent and would be gradual

The full text of the January FOMC meeting minutes can be accessed here. The next FOMC meeting is scheduled for March 15- 16th 2016.

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