Breaking: FOMC Minutes unveil doubts on neutral rate

Federal Reserve officials reportedly expressed mixed views during their meeting earlier this month regarding how much further interest rates might need to be cut. However, they collectively agreed that this was a time to avoid offering clear signals about the future path of US monetary policy.

Officials highlighted the complexities of setting policy in the current environment. Many participants reportedly emphasized the need to focus on underlying economic trends, given the recent volatility in data. They also acknowledged the challenge of determining the neutral rate of interest, which made it difficult to gauge how much current rates were actually constraining economic activity.

The discussion reflected a range of opinions. Some officials reportedly suggested that the Fed could consider pausing its rate-cutting cycle and maintaining rates at restrictive levels if inflation remained stubbornly high. Others argued that the central bank might need to accelerate rate cuts if the labor market weakened or if economic activity showed signs of faltering.

This division underscores the Fed's cautious approach as it navigates a period of economic uncertainty.

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This section below was published as a preview of the FOMC Minutes of the November 6-7 meeting at 18:00 GMT.

• The Minutes of the Fed’s November 7 gathering will come later.
• The Committees’ view of a potential move in December takes centre stage.
• The US Dollar Index remains close to its recent cycle peaks.

The Minutes of the US Federal Reserve’s (Fed) November 6–7 monetary policy meeting will be released later on Wednesday at 19:00 GMT.

The Committee further eased monetary policy with a 25-basis-point rate cut on November 7, following September’s surprising jumbo rate reduction that caught markets off guard.

During that event, Federal Reserve Chair Jerome Powell reportedly avoided providing any clear signals that the central bank might pause its rate-cutting cycle in the near term, despite the widely anticipated 25-basis-point cut. Fed policymakers noted that the labor market had "generally eased," while inflation appeared to be progressing toward the Fed's 2% target.

Powell also did not indicate that a pause was under consideration, with analysts interpreting his remarks to suggest that the Fed might aim for rates below 4%—or close to it—before contemplating a pause. Additionally, Powell reiterated that the upcoming election would not influence the Fed’s near-term policy decisions, emphasizing that the central bank does not speculate on how political outcomes could affect its goals.

Since the early November rate decision, US economic data has remained robust, signaling solid fundamentals alongside an uptick in October’s inflation, as tracked by the Consumer Price Index (CPI). However, Powell’s recent comments made it clear that the Fed is not in a rush to cut rates further, aligning with FOMC Governor Michelle Bowman’s view.

Currently, CME Group’s FedWatch Tool estimates the probability of a quarter-point rate cut at the December 18 meeting at nearly 60%, down from around 75% a month ago.

How could the release of the FOMC Minutes impact the US Dollar?

While another 25-basis-point rate cut seems like the logical next step, investors should not dismiss the possibility of a hold—or even a hawkish hold.

The “Red Sweep” accompanying Donald Trump’s election victory in November has revived expectations of US tariffs, looser fiscal policy, and corporate deregulation, all of which could heighten inflationary pressures sooner rather than later. This scenario could challenge the continuation of the Fed’s easing cycle, potentially forcing the central bank to pause or even halt rate cuts. Could rate hikes be back on the table?

Senior Analyst Pablo Piovano at FXStreet notes that “a glance at the technicals on the US Dollar Index (DXY) shows immediate resistance at the 2024 peak of 108.07 (November 22). Surpassing this level should encounter little resistance until the November 2022 high of 113.14 (November 3).”

“On the flip side, occasional bearish moves should find the next support at the critical 200-day SMA at 103.98,” Pablo adds.