Fed Minutes Reveals Possible Acceleration of the Pace of Hikes if Economy Overheats

The U.S. Federal Reserve’s December meeting minutes released this week revealed two main concerns: a faster growth due to a large fiscal stimulus under the new US President Donald Trump’s rule, and a stronger US dollar, which could weigh on inflation.

“[The] FOMC Minutes carried a fairly hawkish residual score of 0.54, making them the most hawkish minutes since January of 2015,” says an analysis from Prattle, provider of sentiment data that predicts the market impact of central bank and corporate communications.

“This hawkishness was certainly not a surprise after the December rate hike and FOMC statement residual score of 0.27, but it clearly signals that the committee is concerned that the economy may eventually overheat, accelerating the pace of hikes.

“The repeated references to a gradual rate path, however, tempered the tone of the minutes, as some participants were still concerned about downside risks.”

Chinese yuan moves outweigh Fed minutes

The US dollar was weaker across the board on Thursday despite the release of some of the more hawkish Federal Reserve minutes in recent times, according to the London Capital Group.

“The weak dollar in the last 24 hours is likely more a function of yuan strength than any change in expectations for US interest rates,” says Jasper Lawler, an analyst at the London Capital Group.

The offshore Chinese yuan saw its biggest two-day move against the dollar on record in response to a Chinese government crackdown on currency outflows. Mixed US economic data had a neutral effect on the dollar. ADP private payrolls fell short of estimates while the service sector expanded faster than forecast in December.

 

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