Fed Minutes: Hawkish Shift Drives Buck to New Highs

Traders just received the minutes from the most recent meeting of the Federal Reserve policy committee, and the big takeaway is that the FOMC is shifting in favor of normalizing monetary policy sooner than many traders were expecting.

Though the vote in favor of last month’s policy statement was a relatively tame 9-1 decision, with hardcore hawk Charles Plosser as the only dissenter, the recently released minutes showed more discord within the committee than the statement let on. In perhaps the most striking development, the minutes stated, “Many participants noted that if convergence toward the [Fed's] objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated” (emphasis mine). The fact that this hawkish view was shared by more than just “a few” or “some” of the members indicates a broad shift toward normalizing policy within the Fed, a factor that should continue to support the US dollar moving forward.

The minutes went on to emphasize that, “Some participants viewed the actual and expected progress toward the [Fed's] goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the [Fed's] unemployment and inflation objectives over the medium term,” the clearest indication yet that members are coming to the realization that the Fed may be falling behind the curve. The central bank also extensively discussed the specific mechanisms for normalizing policy, including interest on excess reserves and money market interest rates. Moving forward, it’s possible that we could see more divisive votes as some FOMC centrists shift toward the hawkish end while doves, including Chairwomen Janet Yellen herself, lag behind.

This relatively marginal hawkish shift has reinvigorated the rally in the greenback, taking the EURUSD down to test key Fibonacci support in the 1.3250 area, while USDJPY bulls look to target previous resistance in the 104.00 zone. Looking ahead, traders will want to key in to Janet Yellen’s speech at the Jackson Hole summit on Friday to see whether the Fed’s influential leader is coming around to the hawkish views of her compatriots or if she may continue to put a damper on the other members’ growing enthusiasm about the economic recovery.