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The minutes of the May FOMC meeting got released yesterday, and the Greenback tossed and turned, but ultimately tanked as a result. What’s up with that?

Well, here are the key highlights from the latest FOMC meeting minutes that you need to know about.

Overlay of USD Pairs: 15-Minute Forex Chart
Overlay of USD Pairs: 15-Minute Forex Chart

1. Next rate hike appropriate “soon”

Other than stating that it has a hiking bias, the Fed didn’t really provide any detailed forward guidance during the May 2 FOMC statement.

However, the minutes of the meeting heavily implied that the Fed will likely hike in June.

As for specifics, the minutes noted that (emphasis mine):

“Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.”

It should be pointed out, though, that a rate hike is conditional on economic conditions evolving within the Fed’s forecasts (or better).

2. “Some” expect PCE inflation to exceed 2% target

The PCE price index is the Fed’s preferred measure for inflation.

With that said, the Fed happily noted in the minutes that “12-month changes in overall and core PCE prices moved up in March, to 2 percent and 1.9 percent, respectively.”

And from the perspective of “most participants,” the firming of the PCE price index provides “some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis.”

However, the minutes also revealed that:

“Some participants noted that inflation was likely to modestly overshoot 2 percent for a time.”

And here are some of the arguments in support of a possible inflation overshoot:

“A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would likely move slightly above the Committee’s 2 percent objective for a time.”

“In their discussion of the outlook for inflation, a few participants also noted the risk that, if global oil prices remained high or moved higher, U.S. inflation would be boosted by the direct effects and pass-through of higher energy costs.”

In short, some Fed officials expects an inflation overshoot because of the robust U.S. economy and higher oil prices.

3. Fed is worried about inflation expectations

Despite the recent rise in the PCE price index and expectations that inflation may even temporarily overshoot the Fed’s 2% target, the minutes revealed that Fed officials agreed that “it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee’s 2 percent objective.”

And Fed officials were not too convinced that the recent rise in inflation is sustainable because “Market-based measures of inflation compensation remained low, and survey-based measures of longer-term inflation expectations were little changed, on balance.”

4. Fed may let inflation overshoot for a while

Since “some” Fed officials think that inflation may overshoot the Fed’s 2% target and since Fed officials generally agreed that inflation expectations were still low, the minutes revealed that the Fed may allow inflation to temporarily overshoot its target when it noted that:

“[A] temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.”

This is a rather dovish message since it basically states that the Fed will not react to stronger-than-expected inflation by hiking aggressively. In fact, the Fed welcomes stronger-than-expected inflation.

In summary, the minutes revealed that the Fed thinks that another rate hike is likely “soon” which is a hawkish message.

However, the minutes also revealed that the Fed is not confident that the recent rise in inflation is sustainable because inflation expectations remain low.

And since inflation expectations are low, the Fed thinks that it would be A-Okay to let inflation temporarily overshoot the Fed’s 2% target, which implies that the Fed will not hike aggressively in response to stronger-than-expected inflation, which is a rather dovish message and likely dismayed some traders.