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The minutes for the July meeting got released yesterday, and the Greenback had a bearish reaction.

What’s up with that?

Well, let’s take a closer, look shall we?

1. Fed is keeping an eye on global developments

Fed officials talked about three specific global developments: (1) the Brexit referendum, (2) the Italian banking crisis, and (3) China-related developments.

Regarding the Brexit referendum, most Fed officials agreed that the pro-Brexit vote “appeared likely to have little effect on the U.S. economic outlook in the near term.”

However, the negotiation process for an actual Brexit process hasn’t been started yet, and that “had the potential to increase the political and economic uncertainties in that region.”

And these uncertainties, in turn, “could result in spells of elevated volatility in global financial markets” that “could affect economic and financial conditions in the United States.”

Another global development that the Fed is keeping an eye on is the Italian banking crisis. And “some participants” noted that “the weak capital positions and high levels of nonperforming loans at some European banks could also weigh on economic growth in the region.”

There was no immediate threat to the U.S. banking system, however, and “the capital and liquidity positions of U.S. banks remained strong.”

Finally, Fed officials talked a bit about China. And they zoomed in on the “uncertainty about the outlook for China’s foreign exchange policy, and the implications of China’s run-up in debt to support its economy.”

Unfortunately, Fed officials didn’t share the specifics of their discussion on China.

2. On real estate and equities

Moving on, the FOMC minutes revealed that “several participants” discussed the “potential overvaluation” of the commercial real estate market (CRE), as well as the “elevated level of equity values relative to expected earnings.”

This discussion was in relation to the recent investor activity of buying up equities and CRE as a means to get a higher yield in a world with low (and even negative) interest rates.

And so far, there are no imminent signs of a real estate bubble or a potential stock market crash, according to Fed officials.

3. Fed is in wait-and-see mode

Fed officials were actually a bit divided during the July FOMC meetings. A “couple of members,” for example, were not willing to commit to further rate hikes and were keen to “wait for more evidence that inflation would rise to 2 percent on a sustained basis.”

Meanwhile, “some other members” were still open to hiking rates in the future, expecting that “economic conditions would soon warrant taking another step in removing policy accommodation.”

There was also one member who voted for a rate hike then and there, “citing the easing of financial conditions since the U.K. referendum, the return to trend economic growth, solid job growth, and inflation moving toward 2 percent.” And we already know that the sole dissenter was Kansas City Fed President Esther L. George.

July Voting Record

Still, “Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.”

In short, Fed officials were generally in wait-and-see mode. And as I noted in my write-up on the July FOMC statement, the lack of forward guidance back then eroded rate hike expectations, which caused the Greenback to slide.

And looking at the CME Group’s FedWatch Tool, rate hike probabilities took hits across the board. The probability of a December rate hike, for example, dipped from 45.1% to 41.7%.

CME Group's FedWatch Tool
CME Group’s FedWatch Tool

The lack of forward guidance and the Fed’s wait-and-see attitude therefore apparently hurt rate hike expectations once more, which is probably why the Greenback tanked yet again.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

Given the Fed’s wait-and-see attitude, and mixed economic reports such as a stellar NFP report and a rather underwhelming Q2 GDP reading, do you think a rate hike within the year is still in the cards?