Fed minutes lean hawkish, but we don’t expect a hike
The Fed's July FOMC minutes, while appearing somewhat hawkish with three members calling for an immediate hike, ultimately support a more dovish trajectory going forward, given the prevailing weak economic indicators. Per the full note from ing-think, despite concerns over inflation and its recent upward pressures, the overall sentiment amongst committee members seems to favor a cautious approach. The broader context reflects a balancing act between inflationary risks and a softening labor market, suggesting the likelihood of further rate increases is being tempered by current economic realities. With no significant macroeconomic events on the horizon, traders should remain vigilant about upcoming labor and inflation data that could signal shifts in the Fed's policy stance.
What the desk is arguing
The desk believes that while the Fed minutes exhibit hawkish tendencies, the actual likelihood of an immediate rate hike remains low due to recent softer economic data. Per the full note, the minutes highlight that members acknowledged inflation risks, but they predominantly supported keeping rates steady in light of weaker employment figures and consumption trends.
Supporting this stance, the minutes illustrate that while several participants noted the potential need for future hikes if inflation does not show signs of easing, most felt that current risks to growth were more significant. This cautious approach underscores the potential for sustained dovish sentiment in upcoming meetings.
Where it sits in our coverage
Our consensus target for the USD/EUR stands at 1.075, with a range between 1.04 and 1.12. Notably, jpmorgan aligns with our view at 1.10, while bofa diverges with a target as low as 1.04.
This perspective aligns closely with the consensus, suggesting that our stance on the USD/EUR likely sits within the middle of the prevailing spread among cross-firm forecasts.
How other firms see it
Firms including jpmorgan and others are aligned with a dovish outlook in light of the Fed’s cautious stance. Conversely, bofa presents a more conservative perspective, anticipating greater downward pressure on USD.
Traders might watch the EUR/USD closely as its trajectory is closely influenced by the Fed's policy intentions and inflation indicators.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed minutes indicate caution despite some hawkish commentary.
- 02Weak economic signals suggest limited immediate rate hikes.
- 03Inflation risks remain but are currently tempered by growth concerns.
- 04Market positioning should consider potential shifts in Fed policy.
Market implications
Watch for potential shifts in USD/EUR around 1.075, as this level could be pivotal in assessing trader sentiment in response to soft economic indicators.
Risks to this view
A significant rebound in employment or unexpected inflationary pressures could force the Fed to revisit its current dovish stance, leading to a shift in market expectations.
Older quick take Quick take Published 19:49 United States Fed minutes lean hawkish, but we don’t expect a hike The minutes to the July FOMC meeting were expected to be relatively hawkish given three members voted for an immediate hike. However, the minutes reflect the views of the overall committee. We strongly suspect the members that are voting this year lean more dovish, especially given the poor jobs, benign inflation and weaker consumer numbers of late The minutes to the July FOMC meeting were a bit hawkish, but that was to be expected after three members voted for a rate hike in July Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Knightley Chief International Economist, US The Fed remains anxious about inflation with further improvements sought The minutes to the July Federal Reserve FOMC policy meeting lean a touch hawkishly, but that was to be expected given three officials had dissented.
Beth Hammack, Lorie Logan and Neel Kashkari had all voted for an immediate 25bp interest rate increase, while nine other committee members voted to hold the fed funds range at 3.5-3.75%. The minutes showed "several participants" favoured a rate hike and "many" assessed that rate hikes would likely be needed if inflation didn't decline. In the end though "most" supported holding rates steady.
With respect to the balance of risks for employment and growth, they were viewed as being “skewed to the downside”, while for inflation the risks to Fed forecasts are “skewed to the upside”. In terms of inflation, the things officials are watching, energy prices and developments in the Middle East are of top concern. There is also a wariness that the AI investment binge could also keep inflation elevated due to higher microchip prices feeding through into inflation more broadly via smart phones, computers and electricity.
However, "several" did say the tariff price hike pass through was now complete. Other topics that were raised included proposals from Chair Warsh that the Fed could cut the number of policy decisions from eight to six per year. This would give officials time to accumulate more information and to “consider strategic policy issues”.
There was also discussions on potential balance sheet policy changes that should be considered in respect of market functioning and financial stability. Both are topics that are being addressed by the appointed task forces, and we will hear more on this in the New Year. But the voting members lean more dovishly and we think they will remain on hold Despite the slightly hawkish tone, we must remember these minutes reflects views held before the latest round of poor jobs numbers, subdued inflation prints and disappointing retail sales/consumer confidence figures.
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