Fed Minutes to provide clues over possibility of jumbo rate cut

The Minutes of the Fed’s July 30-31 policy meeting will be published on Wednesday.
Details of Jerome Powell and Co’s discussions about policy easing will be scrutinized.
Markets wager a roughly 27% chance of a 50 bps Fed interest rate cut in September.

The Minutes of the US Federal Reserve’s (Fed) July 30-31 monetary policy meeting will be published on Wednesday at 18:00 GMT. Investors will scout for details in the Fed policymakers’ discussions about its policy easing strategy and the economic outlook.

Jerome Powell admits officials discussed a rate cut at July meeting

The Fed maintained its monetary policy settings for the eighth consecutive meeting in July, as widely expected. In its policy statement, the US central bank said that it is attentive to risks on both sides of its dual mandate, a change from the June statement, in which it said it was 'highly attentive' to inflation risks.

Although the Fed repeated that it does not expect it will be appropriate to lower rates until it has gained greater confidence that inflation is moving sustainably toward 2%, Fed Chair Jerome Powell’s remarks in the post-meeting press conference all but confirmed a rate cut in September.

"We are getting closer to being at the point to reduce rates," Powell said and added that a rate cut could be on the table in September. Furthermore, he noted that there was a “real discussion” about the case for reducing rates at the July meeting.

Two days after the Fed announced monetary policy decisions, the monthly report published by the Bureau of Labor Statistics (BLS) showed a further cooling of the labor market in July. Nonfarm Payrolls (NFP) in the US rose by 114,000 in July and the 206,000 increase recorded in June got revised lower to 179,000. Additionally, the Unemployment Rate rose to 4.3% from 4.1%.

Powell’s dovish remarks and the soft jobs report allowed markets to fully price in a 25 bps rate cut in September. According to the CME FedWatch Tool the probability of a 50 bps rate reduction nearly reached 50% earlier in August. With upbeat July Retail Sales and weekly Jobless Claims data easing fears over an economic downturn in the US, the odds of a large rate cut retreated toward 25%.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

When will FOMC Minutes be released and how could it affect the US Dollar?

The Fed will release the minutes of the July 30-31 policy meeting at 18:00 GMT on Wednesday. Investors will scrutinize discussions surrounding interest rate cuts and the economic outlook.

In case the Minutes show that policymakers who advocated for a July rate cut also voiced their willingness for another rate reduction in September, investors could restart pricing in a large rate cut in September. In this scenario, the immediate market reaction could cause the US Dollar (USD) to weaken against its major rivals. Additionally, the USD is likely to stay on the back foot if the report shows that officials are now more concerned about the negative impact of tight policy on the economic outlook and the labor market rather than inflation.

On the other hand, the USD could gather strength if the publication reveals that officials who preferred to lower the policy rate in July wanted to skip a rate cut in September to have more time to assess incoming data.

Eren Sengezer, European Session Lead Analyst, shares a brief technical outlook for the US Dollar Index (DXY):

“The US Dollar Index remains bearish in the near term, with the Relative Strength Index (RSI) indicator on the daily chart pushing lower toward 30. On the downside, 101.70 (static level from December 2023) aligns as interim support before 100.60 (December 28 low).”

“On the flip side, the 20-day Simple Moving Average aligns as dynamic resistance at 103.50 ahead of 104.10 (200-day SMA). A daily close above the latter could attract technical buyers and open the door for another leg higher toward 104.75 (100-day SMA).”

Economic Indicator

FOMC Minutes

FOMC stands for The Federal Open Market Committee that organizes 8 meetings in a year and reviews economic and financial conditions, determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. FOMC Minutes are released by the Board of Governors of the Federal Reserve and are a clear guide to the future US interest rate policy.

Why it matters to traders?

Minutes of the Federal Open Market Committee (FOMC) is usually published three weeks after the day of the policy decision. Investors look for clues regarding the policy outlook in this publication alongside the vote split. A bullish tone is likely to provide a boost to the greenback while a dovish stance is seen as USD-negative. It needs to be noted that the market reaction to FOMC Minutes could be delayed as news outlets don’t have access to the publication before the release, unlike the FOMC’s Policy Statement.

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