It looks like the Greenback has been dancing to Taylor Swift’s latest single, as it decided to shake off its recent losses when the FOMC minutes were released. What exactly did the report contain?
1. Fed to tighten earlier than expected?
One of the biggest shockers in the FOMC meeting minutes was the revelation that policymakers were actually thinking of hiking interest rates earlier than expected. Recall that the latest FOMC policy statement was somewhat dodgy, as their economic outlook was cautious and Yellen declined to disclose any details on the timeline of the Fed’s exit strategy.
For the July meeting, the minutes of their discussions indicated that several policymakers thought that it “might be appropriate to begin removing monetary policy accommodation sooner than currently anticipated.” In particular, Fed officials talked about policy normalization options such as adjusting the interest rate on excess reserves or a temporary use of the reverse repurchase facility.
2. FOMC members acknowledged labor market improvements
Central to their discussions on potential policy tightening were the recent improvements in the jobs market. The minutes showed that policymakers “generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run.” Boo-yeah!
This is a notable change from their previous assessment of the labor market, which dwelled on the falling labor force participation rate and rising underemployment. This time around, the committee acknowledged the strong pickup in hiring for June and that the average monthly gain for the second quarter marked its fastest pace of increase in nearly two years. Of course, the FOMC still cautioned that wage growth remains weak and that there’s a considerable amount of slack left to be absorbed.
3. More upbeat economic assessment
All in all, the Fed’s economic assessment was much more optimistic this time around. While potential risks to growth were discussed, their outlook was more or less balanced, allowing the U.S. dollar to get back on its feet.
Policymakers noted that the GDP made a strong rebound in the second quarter and that inflationary pressures were stronger, although they also pointed out that falling energy and commodity prices might weigh on CPI later on. They also acknowledged that industrial production, factory output, personal consumption expenditures, and housing sales picked up in the second quarter.
Whether the Greenback can be able to hold on to its post-FOMC gains depends on what goes down at the upcoming Jackson Hole Summit, during which Fed Chairperson Janet Yellen is scheduled to testify on the state of the U.S. jobs market and the Fed’s monetary policy plans.
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