FOMC Meeting Minutes - Policy makers see an increase being their next move on interest rates

Release Explanation: The Federal Open Market Committee (FOMC) is made up of members of the Federal Reserve led by Mr. Bernanke. Each of the 12 regions discuss their current economic situation and from there a decision is made. An increase in Interest Rate will have the effect of slowing economic growth. A decrease in Interest Rate is used by a Central Bank to stimulate economic growth. Economic strength can create Inflation, and raising Interest Rates is one of the easiest way to contain Inflation. This is the consequence of the economic releases that have preceded the Interest Rate decision.

The Minutes of the meeting are released 2 weeks after the announcement, revealing the discussions held by FOMC members. Future CPI numbers will reflect the overnight Interest Rates. If Rates go up then CPI goes down and vice versa. The direction of the path for interest rates is the single most important reason why currencies are bought and sold. A strong Interest Rate and robust business cycle will attract foreign investment. A weak Interest Rate will normally lead to a weak Currency as investors swap the higher yielding Currency for a profit.

An example of this is the Carry Trade where Institutions go short JPY and long AUD, in effect selling the JPY Interest Rate of 0.50% and buying the Aussie Interest Rate of 6.50%, and bank the 6.25% net profit.

Trade Desk Thoughts: Minutes of the August 5 FOMC meeting revealed that policy makers debated about policy more strongly than at previous meetings, with some thinking it likely their next move on interest rates would be to the upside. "A number of participants worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets," the minutes said. Members noted that the financial system remained "fragile", with some expressing continued concern about the possibility of an "adverse feedback loop where tighter credit conditions push the housing market even lower." In contrast, several other participants suggested that the risks to the financial system "had receded" and said that credit conditions were "broadly consistent'' with periods of weak growth or recession.''

"The most interesting part of the minutes, and what is likely to be supportive of the dollar going forward, was that most FOMC members were of the opinion that their next move on interest rates would be to the upside, although the timing of when that might occur was not specified," said Matthew Carniol, chief currency strategist at TheLFB-forex.com. "While members did spend much of the meeting discussing the downside risks to growth from a "fragile" financial system and weakening job market, their specific mention of concerns regarding core inflation points to the Federal Reserve being particularly concerned about potential spill-over effects from higher food and energy costs."

Forex Technical Reaction: Currencies are holding steady in the minutes after the release. In the immediate term, traders are more likely to be concerned with the possible effect that Hurricane Gustav may have on oil production from the Gulf of Mexico.

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