On Wednesday the Federal Open Markets Committee (FOMC) released minutes of the latest policy meeting from September 16-17. The dovish tone of the minutes dropped a surprised on the markets and caused the dollar to plunge while US stock markets rallied.
The minutes indicated that the Fed showed signs of concern over the global slowdown and the impact this would have on the US economy as a whole. Also there is fear that recent strength in the dollar has a dampening effect on inflation. The market’s expectations of the ending of the Fed’s QE program (quantitative easing) this year has had repercussions on the dollar, which has gained 10% against the euro and 7% versus the yen so far this year. Excessive dollar strength would negatively impact exports from the US, amid economic turmoil in Europe and Asia, making them more expensive and hence making the US less competitive. Imports to the US would become less expensive, thereby risking deflation on consumer prices.
Based on these concerns, the Fed revealed its intentions that it would keep monetary policy accommodative for longer.
Even before the FOMC minutes, the pullback in the dollar had commenced, with the main catalyst being comments from Fed speakers Kocherlakota and Dudley on Tuesday who both indicated it would be “inappropriate” for the Fed to raise rates anytime next year due to the low level of current and projected inflation.
Minneapolis Federal Reserve Bank President Narayana Kocherlakota put forward his case for low rates by saying that “It’s a ‘wintry economy’ out there, we will still need low rates even as the US strengthens”.
Kocherlakota’s remarks were also resonated by William Dudley of the New York Fed, who said “It still is premature to begin to raise interest rates” because the labor market “still has too much slack and the inflation rate is too low.” The Fed minutes also reiterated that a “significant” amount of slack remains in the US labor market.
The Fed remains data-dependent in its decision of the timing of the hiking cycle and until now has focused on the US jobs market. However the latest FOMC minutes showed that some Fed policymakers are also turning their focus towards inflation and not just jobs. This puts even more weight on their view that rates should stay low for longer.
The dollar weakened against most major counterparts following the release of the FOMC minutes. On a trade-weighted basis the greenback tumbled to 2-week low of 85.046 in early European trading on Thursday, moving well off a 4-year high of 86.746 hit last week. Against the yen, the dollar slipped to 107.59, the lowest since September 17.