The Greenback barely reacted to the release of the latest FOMC meeting minutes, but there are a few points worth noting when it comes to figuring out the longer-term direction of the U.S. currency.
1. FOMC isn’t worried about inflation.
The Fed’s prolonged period of low interest rates and accommodative monetary policy has always sparked concerns about inflation surging way too fast. Many have already urged the Fed to start tightening or to at least accelerate their taper process in order to keep price pressures under control.
What the minutes of the latest FOMC meeting revealed though was that Yellen and her gang of policymakers are not too worried about inflation just yet. In fact, they projected that inflation will stay below the central bank’s 2% goal for quite some time, even with their current easing program. With that, the Fed is likely to carry on with its plan to achieve full employment without losing sleep over inflation risks.
2. Exit strategies are being discussed.
Despite the FOMC’s “Keep calm and carry on” vibe, policymakers seemed to be in agreement that they should start discussing exit strategies. A staff member already presented several monetary policy tools at their disposal, including overnight reverse-repurchase agreements and interest rate increases on excess reserves. These options are aimed at controlling short-term interest rates before the Fed implements an actual benchmark rate hike.
This suggests that Fed officials are taking the latest improvements in the U.S. economy in stride, without shocking the markets with a sudden shift to a more hawkish stance. In other words, policymakers are sending the message that they will be ready for potential tightening but only when economic data shows that it’s fine to do so.
3. Forward guidance is still important.
Fed officials also emphasized the importance of their communication strategy when it comes to gradually reducing their stimulus efforts. For them, forward guidance or an early disclosure of their plans could “enhance the clarity and credibility of monetary policy.”
Bear in mind though that FOMC members previously dumped their forward guidance on the unemployment rate threshold, as Yellen noted that this indicator no longer serves as an accurate measure of labor conditions. Policymakers stressed that they are looking at a wide range of data in their economic assessment but did not specify which data points they are watching.
For now, it seems that the Fed is still on track to end its QE program before 2014 comes to a close and might be looking at gradual tightening measures by next year. Do you think this is enough to keep the dollar supported in the long run? Cast your votes in our poll below!