The minutes from the most recent FOMC meeting three weeks ago – the first such meeting since Donald Trump’s presidential inauguration – were released on Wednesday afternoon. Although Federal Reserve officials noted at that meeting (in which interest rates were left unchanged at 0.50%-0.75%) that it would be appropriate to raise rates "fairly soon," risks to monetary policy tightening were also cited. In the immediate aftermath of the release, market reactions were both mixed and muted as investors attempted to decipher the Fed’s likely policy path.
The minutes stated: "many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the committee’s maximum-employment and inflation objectives increased."
Playing a major role in the meeting were in-depth discussions of the uncertainties and potential effects of anticipated US fiscal stimulus measures, including tax cuts, decreased regulations, and a boost in spending by the Trump Administration. Fed expectations of greater economic growth and inflationary pressures have increased as a result. At the same time, however, Fed members also discussed concerns that a strong and rising US dollar could pose a threat to growth and to monetary policy action. Additionally, the minutes deferred any decisions on dealing with the Fed’s very substantial $4.5 trillion balance sheet until future meetings.
Some members advocated raising rates at "an upcoming meeting" despite the many uncertainties, in order to provide the Fed with more flexibility going forward. In the end, though, the decision to keep rates unchanged in February was unanimous.
While the FOMC minutes appeared to hint at a potentially more aggressive and hawkish Fed stance, the US dollar reversed earlier gains on Wednesday after the release, falling well into negative territory against some its major currency counterparts. This drop could be due partly to the recently hawkish-leaning Fed having already been priced-in to the strong dollar, but also to the Fed’s strong warnings of uncertainty ahead with regard to fiscal policy and dollar strength. US stocks also fell immediately after the FOMC minutes were released but still remained well-supported just off recent record highs.
Continued speculation over the next Fed meeting in mid-March will be of major importance to US dollar movement in the short-term. Although the dollar fell after Wednesday’s FOMC minutes, it remains very well-supported overall on the potential prospect of more rate hikes this year than previously expected. If Fed members remain as hawkish-leaning as they have been in recent weeks, the dollar should continue to benefit, especially if Trump’s pro-growth stimulus plans soon come into clearer focus.