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Hello, forex friends!

The minutes of the Fed’s February huddle got released yesterday.

And if you somehow missed it, then here are the key highlights from the meeting minutes that you need to know about, as well as the Greenback’s reaction.

1. Rate hike “fairly soon”

I noted in my 3 Takeaways from the February FOMC Statement that the Fed didn’t provide any forward guidance, which was a real disappointment.

Well, the FOMC meeting minutes rectified that by revealing that “many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon.”

However, it came with some caveats. Specifically, a rate hike is only warranted if “incoming information on the labor market and inflation were in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.”

2. Uncertainty related to fiscal policy

Fed officials think that “near-term risks to the economic outlook appeared roughly balanced.” However, they expressed “considerable uncertainty about the prospects for changes in fiscal and other government policies.”

Even so, Fed officials “continued to view the possibility of more expansionary fiscal policy as having increased the upside risks to their economic forecasts, although some noted that several potential changes in government policies could pose downside risks.”

In simpler terms, Fed officials are uncertain about the potential effect of more fiscal stimulus under Trump, with Fed officials split between those who think that it would be good and those that think that it would be bad. But for the February FOMC meeting, most see Trump’s planned fiscal stimulus as a good thing (for now).

Interestingly enough, a “couple of participants argued that such uncertainty should not deter the Committee from taking further steps in the near term to remove monetary policy accommodation because fiscal and other policies were only some of the many factors that were likely to influence progress toward the Committee’s dual-mandate objectives and thus the appropriate course of monetary policy.”

However, “other” Fed officials were inclined to have a wait-and-see approach and “cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated.”

3. Stronger dollar poses “downside risks”

Fed officials (“several” of them anyway) was “concerned about the downside risks to economic activity associated with the possibility of additional appreciation of the foreign exchange value of the dollar.”

Fed officials didn’t explain why, but that likely has something to do with exports, since a stronger Greenback would make U.S. exports relatively more expensive and less competitive. This is especially important because Trump intends to bring manufacturing jobs back into the U.S. And a stronger Greenback would make it tougher for U.S. manufacturers to compete when it came to exports. Also, weaker economic growth = no need to hike rates to stop the economy from overheating.

Aside from posing a downside risk to economic activity, “several” Fed officials were also concerned that a further appreciation in the dollar would result in “downside risks to the inflation outlook.” The reasoning for this is rather simple. A stronger Greenback would make imports of non-energy commodities relatively cheaper. Cheaper imports would then mean less inflationary pressure from the tradables inflation component. And weaker inflation = less urgency to control inflation by hiking rates at a faster pace.

Final Thoughts

The meeting minutes, particularly the part about a rate hike “fairly soon,” actually improved rate hike odds, according to the CME Group’s Fedwatch Tool.

Odds for a March rate hike, for example, climbed from 17.7% to 22.1%.

March FOMC Expectations (As of February 22)
March FOMC Expectations (As of February 22)

Meanwhile, odds for a May rate hike improved from 45.9% to 52.1%.

May FOMC Expectations (As of February 22)
May FOMC Expectations (As of February 22)

Despite the higher rate hike expectations, the Greenback tumbled when the meeting minutes got released.

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

The Greenback’s bearish reaction was very likely because of the Fed’s concerns that a further appreciation in the dollar’s exchange rate would pose “downside risks” to both inflation and economic activity.

Another likely reason for the bearish reaction is the Fed’s cautious tone with regard to the fiscal policy since that hints that most Fed officials may be unwilling to hike further until and unless The Donald finally fleshes out his fiscal stimulus plans.

Although some market analysts also say that the Fed’s message in the FOMC meeting minutes was just not hawkish enough for some market players. But then again, rate hike odds did improve, so I’m not too sure about that.