Yesterday’s release of the June FOMC minutes gave very few reasons to doubt the Fed’s determination to keep raising rates.
In a way, the bar for data disappointment and consequent dovish repricing may now be higher.
The minutes of the June FOMC meeting presented a clear and unequivocally hawkish stance. The summary of opinions highlighted some divergence within the committee, with a few members advocating for a rate hike in June. However, they agreed to a pause for now and instead signalled an intention for further tightening through the new dot plot projections. Most participants believed that more tightening would likely occur later this year.
The minutes also acknowledged the ongoing strong growth of the GDP and persistently high inflation, particularly with regards to core inflation, which has not shown any signs of easing this year. The Federal Reserve noted that credit availability remained intact for high-rated borrowers but mentioned that lending conditions had tightened further for those dependent on banks. Nevertheless, the risk of a credit crunch was considered low.
Overall, the minutes provided no reason to doubt that the Federal Reserve would proceed with a rate hike in July, as it is already heavily anticipated (85% priced in), unless economic and inflation data significantly shifted in the opposite direction.
However, the hawkish tone of the minutes may have raised the bar for data to disappoint and cast doubt on further tightening.
The hawkish FOMC minutes have provided the dollar with some strength, clearly indicating a path towards more tightening. Consequently, it would likely require a significant downside surprise for the markets to reconsider their expectations. Bearing this in mind, the dollar’s response to today’s data may not have a long-lasting impact, especially if tonight’s payrolls report continues to support the idea of a tight job market and keeps the possibility of a post-July rate hike on the table.
Market commentary and analysis from Luca Santos, currency analyst at ACY Securities
