The Federal Reserve released late Tuesday the minutes of the Oct. 31-Nov. 1 Federal Open Market Committee (FOMC) meeting. At the meeting, policymakers held rates at the target range of 5.25%-5.5% for a second straight time, after 11 consecutive rate increases. The US Dollar showed a muted reaction to the minutes.
Inflation in the US has fallen significantly, and the minutes indicated that the Federal Reserve remains committed to bringing inflation back down to the 2% target. Members noted that “inflation remains elevated” and the FOMC “remains highly attentive to inflation risks”.
Rate Cuts – Fed vs. Markets
Federal Reserve Chair Powell said at the November meeting that the Fed would “continue to move carefully” and the minutes echoed this stance, with all members agreeing on the need to “proceed carefully”. The minutes gave no indication that members discussed rate cuts at the meeting but noted that members felt that the current policy was “restrictive” and putting pressure on economic activity and inflation”. This stance on rate policy echoes Powell’s comments after the November meeting, when he stated that the Fed “is not thinking about rate cuts at all”.
This position is in sharp contrast to that of the markets, which have priced in a rate hike in mid-2024. The markets believe that interest rates have peaked due to the economy cooling down, and the steady drop in inflation and the current tightening cycle is likely over.
The Fed hasn’t ruled out rate hikes, but such a move seems unlikely unless inflation unexpectedly changes directions and climbs higher. The minutes stated the Fed will proceed with caution and will make future rate decisions based on the data.
The takeaway from the minutes is that the Fed is keeping a close eye on its progress in the battle with inflation and barring any huge improvement in economic activity or a jump in inflation, the Fed plans to continue holding rates for an extended period of time, with rate cuts not on the agenda.
US Dollar Calm, Stock Markets Lower After Fed Minutes
The Federal Reserve minutes have had a very limited effect on the US Dollar. The one exception is the USD/JPY currency pair, which has climbed 0.54% on Wednesday at the time of writing (European session).
In the US, the major stock indices were lower on Tuesday in the aftermath of the Fed minutes.
The S&P 500 Index dropped 9.19 points (0.20%) to close at 4,538.19.
The Nasdaq 100 Index posted a sharper loss, 93.44 points (0.58%) to close at 15,933.62.