Market Wire - Dollar Weakens on Lack of Hawkish Surprises in Fed Minutes

Karthik Sankaran - Senior Market Strategist, ksankaran@cambridgefx.com

Minutes taken during the Federal Reserve’s January 25 meeting largely confirmed market expectations for a more hawkish tilt at the institution. However, given the market’s substantial repricing of the US rate hike profile that followed Chair Jay Powell’s hawkish press conference and more recent inflation data, the sum effect of the release was to marginally lower expectations of precipitate action, with odds of a 50-basis point hike in March falling from yesterday morning’s 60 percent to less than 43 percent.

But the overall message remains that the Fed is satisfied it has fulfilled its employment mandate, is increasingly concerned about the threat of inflation, and will act aggressively to contain inflationary pressures. Powell emphasized in the post-meeting press conference that this is a very different cycle from past cycles and refused to rule out raising rates at consecutive meetings - or in larger-than-normal 50 basis point increments.

This hawkish bias was made even clearer in the discussion of the balance sheet, “as participants agreed that details on the timing and pace of balance sheet runoff would be determined at upcoming meetings [but} generally noted that current economic and financial conditions would likely warrant a faster pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019.”

The absence of further hawkish surprises led the dollar to sell off slightly, while leaving US Treasury yields little changed - but the broader context remains unchanged: this is a data-dependent Fed primarily focused on bringing inflation back down.