What's Up with the FOMC's Dovish Tone?!

Surprise, surprise! The FOMC minutes turned out unbelievably dovish, as policymakers tried to downplay tightening expectations. Although the minutes confirmed that the Fed is on track to end its asset purchases this month, it also showed that the U.S. central bank has no plans of hiking interest rates anytime soon.

Fed officials reiterated that rates would be kept low for a “considerable time” after easing ends, citing concerns about global growth and inflation. In particular, the minutes indicated that policymakers are now worried that dollar rallies are putting downward pressure on price levels. After all, currency appreciation boosts its purchasing power, which could then keep inflation in check – contrary to the Fed’s goals of bringing the annual CPI up to its 2% target. No wonder the Greenback sold off after the minutes were released!

While the dollar’s strength has mostly been rooted in improving U.S. economic data, some policymakers noted that further gains might wind up erasing recent developments. Bear in mind that a stronger local currency makes a country’s exports relatively more expensive in the international scene, possibly weighing on demand. It doesn’t help that most major economies, such as the euro zone and Japan, are slowing down and likely to reduce their imports from Uncle Sam.

Even though policymakers acknowledged the progress in the jobs market, they still retained their assessment that there was a “significant underutilization of labor resources” and reminded market watchers that policy changes would continue to be data-dependent. More hawkish committee members insisted on clarifying the Fed’s forward guidance, which could include specific thresholds for underlying economic indicators, while others argued that this might create more turbulence in the markets.

In a nutshell, the FOMC is still choosing to “err on the side of patience” and wait for more signs of a strong recovery before changing their tone. Cautious is as cautious does!

For now, it looks like the disappointment is still weighing on the U.S. dollar, as it returned most of its recent gains to its forex counterparts. However, this might just be the start of a long overdue market correction, which could eventually be an opportunity to buy the Greenback at better prices. Do you think the latest FOMC minutes will keep the dollar weak for the rest of the year?