Fed Minutes Preview: Focus on details after trimming rates for first time in over four years

• The Minutes of the Fed’s September 17-18 policy meeting will be published on Wednesday.
• Details of Jerome Powell and co’s decision to trim interest rates by 50 basis points taking centre stage.
• The US Dollar Index may correct lower with the news, but the bullish path is right around the corner. 

The Minutes of the US Federal Reserve’s (Fed) September 17-18 monetary policy meeting will be published on Wednesday at 18:00 GMT. Policymakers loosened the monetary policy for the first time in over four years and surprised market players with a  50 basis points (bps) interest rate cut. The decision spurred speculation officials were concerned about the economic progress and hinted at more aggressive trims.

Jerome Powell and co decided to cut rates in the September meeting

The Federal Open Market Committee (FOMC) took action after acknowledging progress towards its inflation goal. “In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent,” the statement reads. However, officials also noted that “job gains have slowed, and the unemployment rate has moved up but remains low.”

The announcement was not a complete surprise, given that Powell and co somehow anticipated the decision to start trimming interest rates. What came as a surprise was the larger-than-anticipated trim, given that market participants were mostly anticipating a 25 bps cut, with only Fed Governor Michelle Bowman calling for a quarter-point cut instead. 

As usual, policymakers repeated that future decisions will be made meeting by meeting based on macroeconomic data. 

Meanwhile, Fed Chair Jerome Powell poured cold water on speculation the large cut came amid concerns about economic progress. In the press conference that followed the announcement, Powell said he does not see anything in the economy suggesting the likelihood of a downturn, adding that the growth rate is solid, inflation is coming down, and the labor market is “still at very solid levels.” 

“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation,” Powell added. 

As a result, the focus shifted to employment. Tepid data released throughout September fueled speculation that the central bank would deliver another 50 bps cut when it meets in November. The US Dollar (USD) came under persistent selling pressure while stock markets cheered cheaper money.

Things changed in the first days of October. The September Nonfarm Payrolls (NFP) report released by the Bureau of Labor Statistics (BLS) showed the economy added a whopping 254,000 new jobs in the month, while the Unemployment Rate unexpectedly eased to 4.1% from 4.2% in August. Those figures clearly indicate a strong labor market, reducing concerns about it. 

As a result, market players dropped bets of a 50 bps cut in November, with the odds for a 25 bps currently standing at around 85%, according to the CME FedWatch Toll.

 

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

The FOMC will release the minutes of the September 17-18 policy meeting at 18:00 GMT on Wednesday. The document may explain the decision and hint at future action, but at this point, it may be old news. The NFP report indeed overshadowed any pre-release speculation about the state of the labor market. 

With inflation coming down, economic growth, and solid employment-related data, it seems that the United States (US) is in the right spot to allow the Fed to reduce rates at a maybe slower but steady pace.

The Minutes will likely show that policymakers are willing to reduce the interest rate further in November, although the extent of such a cut will depend on upcoming macroeconomic data.

In fact, the US will publish the September Consumer Price Index (CPI) on Thursday, and the figures will probably have a broader impact on future Fed decisions, and hence the USD, rather than the FOMC Minutes.

Generally speaking, the more dovish the document, the more pressure there would be on the Greenback, while hawkish words should support the USD.

From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “The US Dollar Index (DXY) seems comfortable above the 102.00 mark after flirting with the 100.00 mark in September. The overall technical stance is bullish, although another leg north is needed to confirm a sustained advance in time.”

“From a technical point of view, the DXY may correct towards 102.00 ahead of the announcement, with near-term support in the 101.90 region. Nevertheless, the daily chart shows that technical indicators hold well into positive territory, with the Momentum indicator still heading firmly north, reflecting buyers’ interest. At the same time, the DXY has overcome its 20 Simple Moving Average (SMA), which gains upward traction at around 101.20, a key dynamic support area. Finally, the 100 and 200 SMAs hold well above 103.00, limiting the mid-term bullish potential.”

Bednarik adds: “The DXY needs to conquer the 103.00 mark to extend gains at a solid pace, with the next resistance area at around 103.80. Once beyond the latter, an unlikely scenario post-FOMC Minutes, the index will enter a clearer bullish path.”