FOMC minutes highlight cautious policy outlook - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has declined modestly following the release of the latest FOMC minutes from their 27th January policy meeting.

    Key Quotes

    “The minutes provided further insight into the Fed’s recent decision to drop its balanced risk assessment which signalled that it has adopted a more cautious outlook for monetary policy in the near-term. The minutes revealed that many FOMC participants judged that downside risks to their economic outlook had increased and that it would be prudent to wait for more evidence about the underlying strength of the economy and inflation before embarking on any further interest rate increases given heightened uncertainty.

    If the recent sharp tightening in financial conditions persists resulting from the stronger US dollar, lower equities and tighter financing costs, the Fed judged that the effect may be roughly equivalent to those from a further firming in monetary policy dampening the need for further interest rate increases. However, a number of participants argued that the magnitude of the adverse financial developments was hard to reconcile with information on the US economy.

    The minutes were consistent with Fed Chair Yellen’s semi-annual testimony from last week limiting its impact on the US dollar. The Fed has signalled clearly that it will reassess its monetary policy outlook at their next meeting on the 16th March. The Fed is unlikely to raise rates again until financial conditions ease. The Fed is expected to signal a more gradual pace of tightening at the March meeting with the consensus projection from FOMC participants likely to remove three to four rate hikes over the next two years compared to their previous forecasts from December.

    For the US interest rate market which is already expecting limited tightening it should be no surprise. For the US dollar to weaken materially, it will likely require the market to begin to believe that the Fed’s next policy move is more likely to be a rate cut.

    However, more recent economic data releases from the US have helped to ease concerns over a more acute economic slowdown in the near-term which would be required to fuel expectations for a reversal in the Fed’s policy to gradually raise rates.

    St Louis Fed President Bullard (voting FOMC member) spoke overnight as well. He was previously one of the more hawkish FOMC members but is becoming increasingly concerned by weakness in market-based measures of inflation expectations. He stated that “I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations”. He defended the Fed’s decision to begin raising rates last year which was designed in part to address the concerns over asset bubbles. Recent market developments have helped ease those concerns giving the Fed more leeway in its normalization process.”
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