Most forex traders expected the latest FOMC minutes to be peppered with cautious remarks but these takeaways suggest that the dollar could gain more support moving forward.
1. Debate to drop “considerable time” phrase
While some dollar bulls were disappointed to find out that the Fed retained the “considerable time” wording in discussing how long they plan to keep rates low, the minutes of the meeting revealed that this phrase actually stirred up a debate.
Hawkish members highlighted the consistent gains in hiring and the rebound in inflation as reasons for the central bank to prepare the markets for a potential rate hike. Dovish policymakers, on the other hand, cautioned that any change in Fed bias might spark too much volatility.
2. Weak inflation no longer a concern?
Nearly a month ago, concerns about a downturn in inflationary pressures cast doubts on the Fed’s ability to tighten monetary policy next year, forcing the Greenback to return some of its recent gains. The latest FOMC minutes suggested that all that inflation drama was much ado about nothing.
Fed head Yellen acknowledged that the likelihood of inflation running persistently below target has declined and policymakers confirmed that the annual CPI could soon move back to 2% in the medium term as the economic slack has diminished.
3. Emphasis on data-dependence of tightening
In good ol’ Fed fashion, policymakers still clarified that any monetary policy adjustments in the future would continue to depend on economic data. In addition, Fed officials warned that the ongoing slowdown in the global economy might weigh on U.S. growth.
For now, the U.S. dollar is drawing support from improving economic data, as forex market participants anticipate that this might soon convince the Fed to drop the “considerable time” phrase and start talking about a “normalization” of monetary policy.