Yesterday the market got a closer look at the thoughts of the Federal Reserve, the United States’ monetary authority. This central bank, whilst not the first to highlight increasing inflationary risks and adjust the policy outlook accordingly, is now arguably the forerunner of post-pandemic policy change. Whilst still in the early stages of its adjustment, the Fed by virtue of the size of the economy it is responsible for and its intrinsic importance to the global economy, stands as a barometer of global monetary conditions and sentiment.
In mid-March the Fed decided to raise benchmark rates for the first time since 2018. The bank only convened on a 25-basis point hike to its target range, shy of the more hawkish expectations that had been building within the market. It was noted that the Fed was likely increasingly behind the curve and the risk of further inflationary pressure and a more dovish for longer Fed was priced back into the market. This included selling pressure within the Dollar and a bid towards commodity currencies, notably CAD and AUD, which showed greater promise of convincing monetary normalisation.
Aside from the policy decision and alternate press conferences immediately after each two-day decision meeting, minutes are also released several weeks later. These provide a more detailed account of the thinking of the institution and its members that resulted in the headline decision several weeks prior. Contrary to the headline March decision, these minutes showed a far more hawkish Fed than implied by the original decision. The minutes showed that there was a strong appetite for a 50-basis point hike at the March and subsequent policy meetings to shock and halt the rise in inflation. In addition to this, it showed the Federal Open Market Committee’s intention to normalise the balance sheet and unwind nearly one-hundred billion Dollars per month of assets accumulated under various quantitative easing programs.
The market reaction was limited with some mild volatility surrounding the minutes’ immediate release with relatively subdued ranges prevailing in the overnight market. The reason for such a muted reaction was that much of the information contained in the minutes was foreboded by Lael Brainard yesterday and priced in accordingly. EURUSD now has March lows in its sights and could continue to chase after them with strong momentum behind the pair following month-end Dollar selling.
Discussion and Analysis by Charles Porter
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