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Dollar Steady After FOMC Minutes Leave A Hawkish Message Amid Signs Of Split

Late on Wednesday, the Federal Reserve (Fed) published the minutes of its meeting held in June 13-14, providing the reasoning behind its decision to raise the fed funds rate for the second time this year to a target range of 1.00-1.25% and its intention to reduce the size of the balance sheet. However, the release of the minutes did not provide a strong support to the dollar, with major currency pairs remaining flat in the forex markets.

The Fed minutes revealed that bank officials are in a hawkish mood as several policymakers in June’s meeting were positive and, therefore, agreed to unwind the stimulus monetary programme within months. The decision came after the Committee judged that current economic conditions give an incentive to tighten monetary policy further, while they also projected that future economic developments will warrant gradual rate hikes.

Regarding the present economic progress, the members said that the labour market is stronger as unemployment rate fell to 4.3% in May and was below the longer-run target, despite disappointing wage growth and slower employment growth. The latter, they explained, was attributed, as expected, to a narrowing labour capacity. Moreover, inflation over the last 12 months rose slightly but remained below the 2% target according to the core PCE price index, which was 1.5% in April. Household spending together with fixed investment continued growing in recent months as well.

In the medium-term, the members anticipate that economic activity will increase moderately and the labour market will strengthen further, whereas inflation is expected to stabilize around 2%. Nevertheless, Fed officials claimed that uncertainty around fiscal policies remain significant as they are likely to adjust, but short-term risks are considered balanced as risks arising from foreign economic developments are less severe now.

Taking the above into account, most of the Fed policymakers decided to raise rates gradually and shrink the balance sheet despite weak inflation. However, a disagreement was found regarding the timing the Fed will start reducing its asset holdings. Some members wanted to initiate the process within months – favouring the upcoming July meeting or August – whereas others preferred to wait longer and assess economic conditions first before taking any action.

There was also a split regarding the pace of future rate increases, with some Committee members voicing concern about the downside risks to inflation, while other participants saw a bigger risk from the low unemployment level that could potentially lead to the economy overheating.

In terms of reaction in the forex markets, dollar pairs showed little response to the Fed’s minutes. The dollar index, which gauges the dollar strength against its major counterparts, moved sideways, last trading at 95.93. Dollar/yen reversed its overnight losses before steadying at 113.41 in early European trading today. Euro/dollar was also steady at $1.1362, while the pound/dollar stood at $1.2940.

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