Breaking: Fed Minutes suggest rates are at their peak

The FOMC Minutes saw some members suggesting that interest rates could be at their peak. In addition, some officials' views pointed at some risks regarding the progress of inflation. Furthermore, the economic outlook was firmer than the December projections, according to some policy makers.

This section below was published as a preview of the FOMC Minutes report at 14:15 GMT.

  • The Fed will release the minutes of the January policy meeting on Wednesday.
  • Jerome Powell and co’s discussions surrounding the policy pivot will be scrutinized.
  • The US Dollar has been outperforming its major rivals since the beginning of the year.

The Federal Reserve (Fed) will release the minutes of the January policy meeting on Wednesday. Investors will pay close attention to comments regarding the inflation outlook and the possible timing of a policy pivot.

Fed is widely expected to leave the policy rate unchanged in March

Federal Reserve Chairman Jerome Powell said in the post-meeting press conference in January that he doesn’t see a rate cut in March as likely. "If we saw [an] unexpected weakening in the labor market, that would make us cut rates sooner,” Powell further explained. After the January labor market report showed that Nonfarm Payrolls rose by 353,000, investors saw that as a confirmation of a delay in the policy pivot and refrained from pricing in a rate cut in March.

With an interest rate reduction as early as March becoming increasingly unlikely, investors started to assess whether May would be the right time for the Fed to start loosening the policy. However, the recent data from the US showed that the economy expanded at a stronger pace than expected in the fourth quarter and the disinflation process lost momentum at the beginning of the year. The Bureau of Labor Statistics reported that core inflation in the US, as measured by the change in the Core Consumer Price Index (CPI), rose 3.9% in January, matching December's increase and surpassing analysts' estimate of 3.7%. Following these developments, the probability of a May rate cut declined toward 30% from above-50% earlier in February, as per the CME FedWatch Tool.

Previewing the January FOMC Minutes “the FOMC's change of tone between the December and January meetings portrayed a Committee that has welcomed the progress made on inflation, but that would prefer to see further confirmation amid strong activity data,”  TD Securities analysts said in a note. “The minutes are likely to unveil further color regarding those discussions, as well as talks around QT tapering.”

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

The Fed will release the minutes of the January policy meeting at 19:00 GMT on Wednesday. The USD Index (DXY), which tracks the USD’s valuation against a basket of six major currencies, rose more than 2% in January and it’s up 0.65% so far in February. 

The market positioning suggests that the USD has more room on the upside if FOMC Minutes feed into expectations for a delay in the policy pivot until June. On the other hand, the USD could come under renewed selling pressure if the publication shows that policymakers are willing to consider a rate reduction by May. However, policymakers’ comments in the minutes are likely to be outdated due to the fact that the meeting took place before the latest inflation and employment data releases. Hence, the market reaction could remain short-lived.

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

“The 100-day Simple Moving Average and the Fibonacci 50% retracement of the October-December downtrend form a pivot area at 104.00-104.10. If DXY fails to stabilize above this region, 103.70 (200-day SMA) aligns as the next important support before 103.25 (Fibonacci 38.2% retracement). Looking north, 104.75 (Fibonacci 61.8% retracement) and 105.00 (psychological level, static level) could be set as the next bullish targets in case 104.00-104.10 holds as support.”

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Swiss Franc.

USD   -0.01% 0.00% -0.11% 0.16% 0.23% -0.04% -0.19%
EUR 0.02%   0.02% -0.09% 0.19% 0.24% -0.02% -0.17%
GBP 0.01% 0.00%   -0.09% 0.17% 0.26% -0.03% -0.17%
CAD 0.11% 0.09% 0.11%   0.26% 0.33% 0.07% -0.08%
AUD -0.16% -0.19% -0.17% -0.28%   0.05% -0.21% -0.36%
JPY -0.23% -0.24% -0.23% -0.36% -0.04%   -0.28% -0.44%
NZD 0.04% 0.01% 0.01% -0.08% 0.19% 0.26%   -0.16%
CHF 0.19% 0.17% 0.18% 0.08% 0.39% 0.45% 0.17%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).


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