Not in the mood to read the entire text of the June FOMC meeting minutes? Well, today’s your lucky day because I’ve summed up the four things you need to remember from this report.
1. QE will end in October this year
If you’ve been keeping track of the Fed’s asset purchase program and their monthly tapering schedule, then you probably would’ve foreseen that QE will be over by October this year. The FOMC confirmed this scenario, indicating that the Fed would not pause or speed up its taper plans.
This was initially taken positively by the U.S. dollar, as the end of easing would mean that the Fed is a few steps closer to tightening monetary policy. Of course Fed policymakers were quick to add that this still depends on whether economic data reflects their projected economic rebound in Q2 or not.
2. Mixed views on labor market
The actual FOMC statement indicated that policymakers believed that labor prospects were improving, as they upgraded their employment forecast for the year. However, they still highlighted persistent risks, such as trends in the participation rate and long-term unemployment.
Take note though that this meeting was held prior to the release of the strong NFP data for the month of June, which reflected notable improvements in a few labor market indicators, such as wage growth. Some Fed officials are feeling more optimistic about reaching their goal of achieving full employment faster than anticipated.
3. Low U.S. bond yields led to USD selloff
Despite the Fed’s positive outlook, traders barely showed any love for the Greenback after the minutes were released. After the initial rally that lasted a few moments, the U.S. currency retreated when FOMC policymakers dashed hopes of a rate hike taking place early next year.
This led to a sharp decline in U.S. 10-year yields from an intraday high of 2.60% to 2.55%. As discussed in our School of Pipsology lesson on bonds, falling U.S. bond yields are typically dollar bearish as this reflects weak interest rate expectations.
4. Problems with excessive risk-taking?
Another factor that pushed the dollar lower against most of its forex counterparts was the return of risk appetite. After all, the promise of keeping interest rates low for the foreseeable future means a prolonged period of easy money for the U.S. economy. Lending and spending could continue to stay supported, sealing in better prospects for U.S. companies and overall economic activity.
This appeared to be a concern among a few Fed officials though, as some pointed out that measures should be taken to “address excessive risk-taking and associated financial imbalances.”
Some suggested that a more transparent communication strategy could address this. “It was observed that it would be useful for the committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate,” according to the minutes.
In a nutshell, the minutes were not too dovish but not too hawkish either. Judging from the forex market reaction, it seems that traders are waiting for clearer signs from the Fed before regaining a bullish bias on the dollar. Do you think the Greenback is in for longer-term weakness?