Breaking: Fed Minutes leave the door open to a probable rate cut in September

Despite expressing disappointment over recent inflation readings, Federal Reserve officials at their last policy meeting indicated they still believed that price pressures would gradually ease. This sentiment was reflected in the minutes of the Fed's April 30-May 1 session.

Although the current policy response would "involve maintaining" the central bank's benchmark policy rate at its current level, the Minutes released on Wednesday also included discussions of potential further hikes.

The minutes also revealed a debate about the restrictiveness of the current monetary policy in light of the economy's strength. This discussion is crucial, considering the need for policy to be "sufficiently" restrictive to curb inflation.

Policymakers currently appear inclined to maintain the Fed's benchmark rate in the 5.25%-5.50% range at least until September, after their confidence in easing price pressures was undermined by higher-than-expected inflation during the first three months of this year.

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This section below was published at 09:00 GMT as a preview of the release of the FOMC Minutes of the May 1 meeting.

• The Fed will release the minutes of the April 30-May 1 policy meeting on Wednesday.
• Jerome Powell and co’s discussions surrounding the inflation outlook will be scrutinized.
• Markets see a less than 40% probability that the Fed will leave the policy rate unchanged in September.

The Federal Reserve (Fed) will release the minutes of the April 30-May 1 policy meeting on Wednesday at 18:00 GMT. Investors will pay close attention to comments regarding the inflation outlook and the possible timing of a policy pivot.

Fed is widely anticipated to hold policy steady in June and July

The Fed left unchanged its monetary policy settings following the April 30-May 1 policy meeting as expected. In its policy statement, the US central bank said that there has recently been a lack of further progress toward the 2% inflation target. Regarding the quantitative tightening strategy, the Fed noted that they will slow the decline of the balance sheet by cutting the Treasury redemption cap to $25 billion per month from $60 billion starting June 1. 

In the post-meeting press conference, Fed Chairman Jerome Powell noted that it was unlikely that the next policy move would be another rate hike but explained that it could be appropriate to hold off on interest rate cuts if inflation proves more persistent and labor market remains strong. Powell reiterated that they need to have greater confidence in inflation moving toward 2% before considering a policy pivot.

The data published by the US Bureau of Labor Statistics showed on May 15 that the core Consumer Price Index (CPI) rose 3.6% on a yearly basis in April. This reading followed the 3.8% increase recorded in March and came in line with the market expectation. On a monthly basis, the CPI and the core CPI both rose 0.3% after rising 0.4% in March. 

According to the CME FedWatch Tool, markets see little to no chance of a Fed rate cut either in June or July. The probability of the Fed holding the policy rate in September, however, stays about 37%.  

Previewing the Fed’s publication, “the minutes from the most recent FOMC meeting are likely to grab attention next week following the Committee's decision to communicate that "higher for longer" remains the policy of choice in the near horizon,” TD Securities analysts said and added: “Further color regarding the decision to taper QT will also be in focus.” 

When will FOMC Minutes be released and how could it affect the US Dollar?

The Fed will release the minutes of the April 30-May 1 policy meeting at 18:00 GMT on Wednesday. Investors will pay close attention to discussions surrounding the inflation outlook and look for possible hints on the timing of the policy pivot.

Following the release of the April inflation report, several Fed policymakers adopted a cautious language regarding the rate outlook while recognizing the modest progress in disinflation. San Francisco Fed President Mary Daly noted on Monday that, while she expects shelter inflation to improve slowly, as she said that she doesn't expect progress to be quick. Daly also noted that she is not confident that inflation is sustainably coming down to the Fed's 2% inflation target. Additionally, Fed Vice Chair for Supervision Michael Barr argued that the Fed is in a good position to hold the policy steady and watch the economy.

In case the minutes show that policymakers lean toward taking a patient approach to policy easing in the face of strong inflation and favor a single rate cut later in the year, the US Dollar (USD) could hold its ground against its major rivals. If the publication suggests that officials are increasingly concerned about the growing signs of a slowdown in economic activity and remain optimistic about the inflation outlook, risk flows could dominate the markets and hurt the USD. 

Eren Sengezer, European Session Lead Analyst, shares a brief technical outlook for the USD Index:

“The USD Index (DXY) stays dangerously close to the 104.30-104.20 area, where the 200-day and the 100-day Simple Moving Averages (SMA) are located. In case the index falls below this area and starts using it as resistance, technical sellers could take action. In this scenario, 103.70 (Fibonacci 50% retracement of the January-April uptrend) could act as interim support before 103.00 (Fibonacci 61.8% retracement). On the upside, resistances could be seen at 105.25 (Fibonacci 23.6% retracement, 20-day SMA), 106.00 (static level, psychological level) and 106.50 (endpoint of the uptrend).”