Why the September FOMC Minutes Led to a Dollar Selloff

Just when it seemed that most forex junkies were ready to take any upbeat Fed remarks with a grain of salt after seeing the disappointing September jobs report, the FOMC minutes revealed that policymakers weren’t THAT hawkish at all! Here are some reasons why the transcript of the Fed’s latest meeting spurred a dollar selloff:

Decision to hold rates was nearly unanimous

Contrary to what some Fed officials suggested in their recent testimonies, the decision to hold interest rates during the September FOMC meeting didn’t really come down to the wire. In fact, the committee’s vote was nearly unanimous, with only one member voting to tighten monetary policy right there and then. Majority of the voting members agreed that “although the U.S. economy had strengthened and labor underutilization had diminished, economic conditions did not warrant an increase in the target range for the federal funds rate” at that time.

China could be a problem

Just like most of the other central banks, the Fed admitted that the slowdown in China could pose significant risks to the global economy. While their domestic outlook suggested that the U.S. economy could stay resilient, FOMC members explained that the spillover effects to Asia and emerging nations could weigh on commodity prices and international demand for U.S. exports. Because of that, “the committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated.”

Downside risks to inflation increased

In line with their expectations of weaker commodity prices, FOMC members shared a more pessimistic inflationary outlook. “Participants anticipated that the recent global developments would likely put further downward pressure on inflation in the near term,” the minutes indicated. “Compared with their previous forecasts, more now saw the risks to inflation as tilted to the downside.”

In addition, Fed officials also noted that a potential downturn in the global economy could spur stronger demand for the safe-haven dollar, putting additional downward pressure on domestic price levels.

Still waiting for stronger jobs growth

The U.S. labor market had been doing pretty well leading up to the September FOMC meeting, allowing most members to acknowledge that “the improvement in labor market conditions met or would soon meet one of the Committee’s criteria for beginning policy normalization.” However, some policymakers still mentioned that they’d like to see stronger signs of progress in employment.

The minutes even revealed that FOMC members are counting on further declines in the jobless rate to help the economy move closer to achieving its inflation goals. And then the latest NFP report let the dollar’s forex fans down by showing that the labor market isn’t able to deal with all that pressure.

At the end of the day, the committee concluded that their outlook for the U.S. economy remains more or less the same as in the previous months but that uncertainties have increased. As usual, the FOMC emphasized the two conditions that must be met before tightening: further improvement in the labor market and confidence that inflation can move back to its 2% target in the medium-term. Take a look at my Monthly Economic Review to see if the U.S. is moving closer or farther away from these liftoff goals.