• Fed discussions will reinforce labor market, inflation concerns.
  • No change in rate policy or bond purchases at January meeting.
  • Minutes should second the dovish cast of Fed outlook.
  • Rising US Treasury rates supporting dollar, 10-year closes at 1.3%.

The Federal Reserve had followed a clear and consistent monetary policy for almost a year, zero rates, bond purchases and fiscal support from the government until the labor market has fully recovered and the economy is humming again.

In his latest evocation of the central bank outlook to the Economic Club of New York last week, Chairman Jerome Powell suggested that any increase in inflation could fall prey to they slowly recovering labor market. He noted that the actual unemployment rate as defined by folks who want but are unable to find work is probably closer to 10% rather than the official 6.3% rate.

“The recent improvements in the labor market have not put unnecessary upward pressure on inflation as expected, in fact inflation has not even continued to rise to 2%. We have every reason to believe that, had it not been for the outbreak, the labor market could have strengthened further without triggering a worrying rise in inflation,” observed Mr Powell in his speech.

If the tightest job market in half a century before the pandemic struck the United States in March with a 3.5% unemployment rate, was not generating inflationary wage pressure as employers competed for scarce labor, then the current state is certainly no threat.

US Unemployment Rate (U-3)


“We will continue to buy $80 billion of Treasuries and $40 billion of mortgage-backed securities (MBS), each month until substantial progress is made on maximum employment and price stability goals," Mr. Powell repeated last week.

FOMC minutes

The edited record of the January 26-27 meeting will be useful in three areas.

First it should denote the governors' views on the slowdown in hiring in December and January. Specifically, whether it was a function of the reimposed lockdown in California and restrictions in other states or a more endemic problem related to the retreat in consumer spending in the fourth quarter and the gradual erosion of retail and service jobs as the business failures in those sectors continue unabated.

Second, the discussion may elucidate the members' thinking on the criteria for tapering bond purchases and a possible schedule for reduction. Any mention of a time frame beyond the vaguest notion of sometime in the future is highly unlikely, as markets would treat it as a prediction.

Finally, markets will be most interested in the governors' view on rising interest rates.

From the December 16 close of the prior FOMC meeting at 0.92% to end of the January 27 meeting the 10-year Treasury had gained nine basis points to 1.01%. Or, to put it more accurately, the Fed had acquiesced in the increase by not using the bond purchase program to prevent it.

In the three weeks since, the 10-year Treasury has added 30 basis points to close on Tuesday at 1.31%. That is the highest yield for this benchmark government debenture since February February 26 last year, before the Fed began its historic pandemic intervention. Whatever the governors views on appropriate market rates were in late January are doubly relevant now.


Conclusion and the dollar

The recent rise in US interest rates is a double function, equal parts market intention and Federal Reserve permission.

Credit markets believe that the US recovery is approaching and as it picks up speed yields will move higher.

Historically, there is considerable room for rates to rise and bond prices to fall. From mid-December 2019 to the middle of January 2020 the the 10-year yield moved between 1.77% and 1.92%. In 2018 the range was 2.41% to 3.23%%.


The increase in US Treasury yields has been the primary logic behind the dollar's recent gains. 

Will the Fed draw a line on the rise in interest rates and where? There is no more pertinent question for the financial and currency markets at the moment. If the FOMC minutes are unlikely to provide an answer, even a hint could send markets running.



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 climbs to fresh monthly highs above 1.0350

EUR/USD climbs to fresh monthly highs above 1.0350

Following a short-lasting downward correction, EUR/USD has regathered its bullish momentum and touched its highest level in a month above 1.0350. After the soft July inflation data, the dollar remains under constant selling pressure, fueling the pair's rally.


GBP/USD advances beyond 1.2250 as dollar selloff continues

GBP/USD advances beyond 1.2250 as dollar selloff continues

GBP/USD has advanced to a fresh weekly top above 1.2250 on Wednesday. Pressured by the weaker-than-expected July figures, the US Dollar Index is down more than 1% on the day below 105.00, providing a boost to the pair.


Gold tries to claim $1,800 amid falling US yields

Gold tries to claim $1,800 amid falling US yields

After having failed to reclaim $1,800 with the initial reaction to US inflation data, gold is, once again, attempting to break above that key level. The benchmark 10-year US Treasury bond yield is down nearly 2% on the day, helping XAU/USD push higher.

Gold News

Crypto markets tumble, but the worst is yet to come

Crypto markets tumble, but the worst is yet to come

Bitcoin price is trying to undo the gains it witnessed over the last week and is currently at the midway point. This sell-off has caused Ethereum and Ripple prices to follow suit, pausing the rallies that altcoins were experiencing.

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!