If you’re wondering why the Greenback sold off after the FOMC meeting minutes were released, you gotta take a look at what Fed officials had to say and why forex market participants thought the report was less hawkish than expected.
You see, after the FOMC dropped the “considerable time” phrase and mentioned that they “can be patient” considering policy normalization in their latest statement, many believed that the minutes of their meeting would contain more clues on timing of the Fed’s rate hike this year. However, these main points suggest that policymakers aren’t in a rush to tighten just yet:
1. Policymakers concerned about hiking too soon
Even though the U.S. economy has been churning out one impressive report after another, Fed officials said that there are still plenty of risks associated with raising interest rates too soon. With that, they are inclined to keep rates near zero “for a longer time” especially since inflationary pressures have been weakening.
Policymakers also debated on their communication strategy, with some cautious members pointing out that financial markets might overreact to any significant changes in rhetoric. Fed head Janet Yellen clarified that they’d like to be “reasonably confident” that inflation can reach its 2% target before expressing any rate hike biases.
2. Higher cap on reverse repo program?
There was also a bit of discussion on the Fed’s reverse repurchase agreement plan, which is an experimental program intended to help the central bank set a floor for short-term interest rates. With this program, the Fed grants loans of Treasury securities to banks in exchange for cash, and the interest rate paid on these loans is used to set a lower boundary for its target range for benchmark rates.
Now the Fed has set a daily limit of $300 billion on its overnight reverse repos and officials have suggested that they raise the cap in order to accommodate stronger demand. If they do so, the program could have a wider scope in gradually increasing borrowing costs quoted by banks on mortgages, business loans, and credit cards.
3. Concerns about China and Greece
For now, most policymakers would rather sit on their hands and watch economic developments unfold before making any decisions. While domestic growth has stayed more or less supported, officials focused on external risks stemming from other major economies.
In particular, FOMC members noted that China’s economic downturn is a “factor restraining economic expansion in a number of countries,” as the world’s second largest economy chalked up its slowest annual growth since 1990. To top it off, the financial uncertainty in Greece was also a cause of concern, along with tensions in the Middle East and Ukraine.
Dollar bulls were disappointed to find out that most Fed officials aren’t too eager to hike just yet, leading some to drop their rate hike expectations for June this year. Still, this doesn’t change the fact that the U.S. is one of the better performing major economies out there and that the Fed isn’t likely to cut rates anytime soon. Do you think this will be enough to keep the dollar supported or is the Greenback in for an extended selloff?