FOMC minutes signal more USD upside – DBS

The FOMC Minutes for the December 17-18 meeting had positive takeaways for the USD, DBS’ Senior FX Strategist Philip Wee notes.

Fed’s cautious stance is USD negative

“Fed officials cited two primary reasons for caution in lowering rates in 2025. First, the monetary policy stance has become significantly less restrictive after 100 bps of cuts to 4.25-4.50% in September-December. Second, President-elect Donald Trump’s policies on tariffs, tax cuts, and immigration could delay the return of inflation to its 2% target. The Fed projected two rate cuts in 2025, significantly fewer than the four forecasted three in September.”

“In 2017, Yellen leaned towards ensuring that the tightening did not derail growth amid rising inflation (PCE inflation rose to 1.8% in 2017 from 1% in 2016). The greenback was weaker throughout 2017 after its rally into Trump’s victory at the US election in November 2016, until Trump’s tariffs arrived in 2018 and increased the Fed’s vigilance on inflation with trade tensions contributing to the USD’s haven status.”

“Powell’s current caution is rooted in ensuring that lowering interest rates from elevated levels does not undo the progress made since 2022 in controlling inflation with a soft landing. With Trump’s tariffs arriving at the outset of his second term in less than two weeks, amid a resilient US economy compared to a lackluster Chinese economy and stagnation in the Eurozone, the FOMC minutes should support the case for the USD to extend its Trump Trade rally into this year.”