It appears that all roads lead to a Fed interest rate hike in December, with the latest FOMC meeting minutes revealing that most policymakers are in the hawkish camp. Is the Greenback about to leave its forex peers eating its dust?
According to the transcript of the Fed’s October monetary policy huddle, majority of the committee members agree that the U.S. economy can be able to check off the items on its pre-liftoff to-do list. “Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting,” the minutes indicated.
In fact, the report also revealed that some officials already thought that an interest rate hike was warranted right there and then, but some also argued that the economy wasn’t ready yet. After all, data from the U.S. economy has been mixed lately, with jobs growth making a strong comeback from its earlier slump, consumer spending and business activity looking feeble, and inflation figures simply coming in line with expectations.
Even so, policymakers judged that external threats have subsided, as U.S. financial markets emerged unscathed from the global stock market rout a few months back. “Most participants saw the downside risks arising from economic and financial developments abroad as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be nearly balanced,” the minutes showed.
Much of the discussions focused on what might be in store for the U.S. economy and Fed policy after the liftoff. As always, policymakers emphasized that the next potential tightening moves would be slow and gradual, taking upcoming data into consideration and proceeding on a meeting-by-meeting basis.
Fed officials also zoomed in on the real interest rate, which is a fancy term for interest rates adjusted for inflation and consistent with full employment. Calculations and projections presented by the staff supported the idea that the equilibrium or ideal level of real interest rates would stay low for quite some time, underscoring Fed head Yellen’s usual remarks on the shallow trajectory of rate changes.
For some forex market watchers, all that talk about the long-term path of interest rates was just the Fed’s way of keeping market expectations in check and preventing hardcore dollar bulls from partying too much. Come to think of it, additional rallies for the U.S. dollar could put downside pressure on price levels, making it more difficult for the economy to reach its 2% inflation goal later on.
At the end of the day, the latest FOMC meeting minutes left very little room for doubt that the Fed can be able to announce an interest rate hike before the end of the year. These expectations have been priced in for quite some time already, though, which was probably why the Greenback hesitated to stage a strong forex rally right after the report was printed. Still, the U.S. central bank is the only hawkish one around, which suggests that the U.S. dollar could end 2015 on a very strong note, even with a slow tightening cycle down the line.