• FOMC will release the minutes of the May policy meeting on Wednesday, May 25.
  • Markets have already priced in two more 50 bps Fed rate hikes.
  • Investors will pay close attention to discussions around the Fed's balance sheet reduction plan.

The greenback is having a hard time preserving its strength toward the end of May and the US Dollar Index (DXY) remains on track to post monthly losses for the first time in 2022. Following the US Federal Reserve’s decision to hike its policy rate by 50 basis points (bps) earlier in the month, policymakers have been voicing their willingness to raise the policy rate by a total of another 100 bps in the next two meetings.

Two more 50 bps Fed rate hikes a done deal 

Markets seem to have already priced in those expectations with the CME Group FedWatch Tool pointing to a more-than-80% probability of the Fed hiking by 50 bps in June and July. Hence, the dollar is struggling to find demand as investors see the US central bank adopting a cautious stance moving forward. Renewed optimism about the annual Consumer Price Index (CPI) having peaked at 8.3% in April and the hawkish tilt in other major central banks’ policy outlook, especially the European Central Bank (ECB), play a part in the recent dollar weakness as well. Nevertheless, there is still a bit of room for a hawkish surprise in the FOMC’s May Meeting Minutes.

Eyes on details surrounding QT

In the May policy statement, the FOMC announced that it will begin trimming its balance sheet on June 1, starting with a $47.5 billion cap on monthly runoff and rising to $95 billion monthly after three months. As it currently stands, the Fed is on track to execute a monthly reduction of $60 billion in Treasury securities and $35 billion of mortgage-backed securities each month from September. 

The meeting minutes could offer additional details on the Fed’s quantitative tightening plan. When the Fed decided to raise the policy rate in 2017, the prepayment rate on MBS, which represents the ratio of borrowers paying the principal on their mortgages ahead of schedule, declined significantly. Jefferies economist Aneta Markowska thinks that if the prepayment rate were to fall to 10% from about 30%, as witnessed in the previous tightening cycle, MBS outflows could average about $20 billion a month. In such a scenario, the Fed would have to start selling MBS to reach the monthly reduction target of $95 billion.

While speaking at an event last week, New York Federal Reserve President John Williams said that their forecasts suggested that they won’t be able to reach the $35 billion monthly target for MBS redemptions and added that selling MBS could be an option down the road. The issue with MBS sales, however, is that they could translate into losses for the Fed. "A potential drawback of sales is that, depending on the interest rate path, they could result in realized market-to-market losses," Cleveland Federal Reserve President Loretta Mester said earlier in the month. Mester acknowledged that it would be a difficult problem to solve, especially at the political level. 

In case the Fed’s publication shows that policymakers are willing to sell MBS to stay on the monthly QT target of $95 billion regardless of the potential political pushback, this could be seen as a hawkish development and help the greenback start outperforming its rivals.

On the other hand, the dollar could extend its downward correction if the minutes don’t offer any fresh insight into the Fed’s QT plan and reaffirm that policymakers remain reluctant to commit further policy moves after two more 50 basis points rate hikes.

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. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

EUR/USD steadies near 1.0550, looks to post modest weekly gains

EUR/USD steadies near 1.0550, looks to post modest weekly gains

EUR/USD has lost its bullish momentum after having climbed above 1.0570 with the initial reaction to the US data in the American session and retreated toward the mid-1.0500s. On a weekly basis, the pair remains on track to close in positive territory. 


GBP/USD struggles to hold above 1.2300

GBP/USD struggles to hold above 1.2300

GBP/USD has edged lower following a jump above 1.2300 in the early American session on Friday. The market mood remains upbeat ahead of the weekend with Wall Street's main indexes posting strong daily gains on upbeat US data. 


Gold stays below $1,830 as US yields edge higher

Gold stays below $1,830 as US yields edge higher

Gold continues to fluctuate below $1,830 on Friday and looks to close the second straight week in negative territory. Fueled by the risk-positive market environment, the benchmark 10-year US Treasury bond yield is up more than 1% on the day, limiting XAU/USD's upside.

Gold News

Why Cardano could surprise over the weekend

Why Cardano could surprise over the weekend

ADA  set to close out the week with a gain on the workday trading week and over the weekend? Central banks signaled that the rate hike cycle is ending, meaning less stress and tight conditions for trading, opening up room for some upside potential with Cardano set to pop above $0.55 and test a significant cap.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!