The dollar struggled to recover yesterday after its worst week in two months, with Friday’s strong United States labour market report having failed to change the market view that the Federal Reserve will only raise interest rates once this year, if at all. “A couple” wanted a rate hike at the March meeting, including Kansas City Fed President Esther George, who dissented against the decision to keep rates unchanged. Fed critics who have advocated for auditing the central bank and requiring the group to adhere to stricter rules and regulations about when they should and shouldn’t hike rates will likely seize upon the minutes as an indication that the central bank isn’t operating effectively without pre-defined definitions of what is and isn’t economic progress.
Advertisement
Sentiment at the Fed could shift.
Subdued retail sales and inflation data on Monday suggested the central bank might consider cutting rates in the months ahead. “Some participants” of the Federal Open Market Committee said the domestic labor market was “at or near … maximum sustainable employment”. Traders are keeping a close eye on the RBA, which is set to release its latest policy minutes.
The Fed’s next policy meeting is April 26-27. While economic data points here and there may give the Fed an excuse to raise rates by a quarter point or refrain from doing so at any given FOMC meeting, in the grand scheme of things, a quarter point hike or not does not matter. Expectations the Fed would outpace other central banks in raising rates also tightened financial conditions by leading the dollar to strengthen in 2014 and 2015, though the consensus for caution has helped stabilise the U.S. currency. “But it’s clearly not a done deal”, he said in a note to clients.
Investors were turning their attention to Wednesday’s minutes of the Fed’s March meeting for fresh indications on the future path of interest rates.
Several “expressed the view that the underlying factors overseas that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks”. Wall Street expects the minutes to reflect Fed Chair Janet Yellen’s dovish bias given her recent statements about the downside pressure to the US economy from weak global economies.
Yet when it came to lifting the lid on what precisely was said at the last rate-setting meeting, markets were fairly non-plussed.
“The minutes continue to indicate that rate normalization is still very much the primary focus of policy”, he said.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that the minutes showed a clear split inside the Fed over two main issues: how fast inflation will rise to the Fed’s 2 percent target and how much the overall economy will be hurt by global weakness.
Advertisement
But the turmoil in financial markets and a slowdown in global economy since the start of the year have raised increasing concerns about the strength of the US economy, forcing Fed policymakers to hold off on any further rate hikes since then.
