Fed reaffirms likely December rate hike despite concerns over weak inflation
|The US Federal Reserve released minutes of its September FOMC meeting on Wednesday, and the message was partly a reaffirmation of a widely-expected December interest rate hike, despite the Fed’s concerns about low inflation. While some Fed officials were concerned that weak inflation could be a longer-term issue, there was more of a consensus that a third interest rate hike this year would likely be warranted. Despite inflation concerns, members saw economic growth as healthy and improving. Further, some officials warned that hesitancy “in removing policy accommodation could result in an overshoot of the Committee's inflation objective in the medium term that would likely be costly to reverse.” In addition, the Fed had already been expecting September job growth to suffer weather-related damage, which confirms that the disappointment in the September non-farm payrolls data released last week will not have any significant impact on the Fed’s stance.
Despite the Fed’s reaffirmation of its likely intention to raise interest rates in December, the US dollar fell against other major currencies in the aftermath of the FOMC minutes release. The US dollar index had already been pressured earlier on Wednesday, extending its pullback from multi-week highs of late last week. This dollar weakness had been driven largely by a combination of profit-taking, growing concerns about the Trump Administration’s ability to fulfill its fiscal policy promises (most notably tax reform), and a relief rally for the euro on the back of a reduced threat of Catalonian secession from Spain.
These pressuring factors continued to weigh on the dollar even as the release of Fed minutes on Wednesday maintained market expectations for a December rate hike near 90% likelihood. Going forward, until the pivotal December FOMC meeting, dollar direction should be primarily dictated by the success or failure of US fiscal policy changes as well as speculation over who will be nominated and appointed to head the Federal Reserve after current Chair Janet Yellen’s term expires early next year. More likely than not, the new appointee will be more hawkish than Yellen, which could ultimately lead to a significant boost for the currently depressed dollar.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.