FOMC Minutes Are More Dovish, US Dollar Drops

The minutes of the FOMC meeting show that the members are not as aggressive as the market previously thought. As a result, the dollar also declined.

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Minutes for the January 2022 FOMC meeting released early this morning (17/February) stated that the Fed's policy makers will soon start raising benchmark interest rates and reducing bond purchases. Some members also expressed their concern for US financial stability. According to them, monetary easing could pose substantial risks if sustained.

"Highlighting the Federal Reserve's current high level of securities holdings, meeting members observed that a significant reduction in balance sheet size would be appropriate policy," the minutes of the FOMC meeting said.

US inflation continues to soar is the main reason why interest rate hikes should be done. In fact, aggressive increases may be needed if inflation persists. However, Fed officials actually expected that inflation would decline after the first Rate Hike was implemented.

"Most of the participants noted that if inflation does not fall as well as their expectations, then the appropriate policy for the FOMC to take is to remove accommodative policies at a faster rate than anticipated," the minutes said.

Responding to the contents of the minutes of the meeting, analysts predicted that the Fed could raise interest rates at every FOMC meeting this year. However, with the third wave of Corona virus infections only peaking in the US when the meeting was held, the minutes did not actually provide a clear indication of how high the point of interest rate hikes should be, and what the exact direction of the next policy would be. The idea of a half percent rate hike put forward by the President of the Fed St. Louis James Bullard also doubts that it can be announced immediately next month.

Market Lowers Hawkish Expectations, Dollar Slumps

Markets judged that the FOMC minutes this time around were more dovish than the last policy announcement. Therefore, the stocks declined and the US Dollar weakened. Dollar Index is down 0.18% to 95.80 at press time.

"The market revised their interpretation (of the Fed's monetary policy) to relatively dovish expectations," said Simona Mocuta, economist at State Street Global Advisors. "Frankly, I find the Fed anticlimactic."