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Federal Reserve Signals Prolonged Caution Amid Inflation Concerns

A Report by CYS Global Remit Counterparty Sales & Alliance Unit 


The Federal Reserve, as the central bank of the United States, plays a crucial role in controlling the value and stability of the U.S. dollar (USD) through its monetary policy tools. By adjusting the federal funds rate, engaging in open market operations, and setting reserve requirements for banks, the Federal Reserve influences inflation, employment, and economic growth. These actions help regulate the supply of money in the economy, aiming to maintain price stability and promote sustainable economic conditions, thereby directly impacting the strength and stability of the USD in both domestic and international markets. 


Dollar Seeking Direction Ahead of Fed Minutes 

The U.S. dollar remained steady on Tuesday, showing a slight increase earlier in the week after several Federal Reserve officials advocated for continued caution in policy decisions, despite last week’s data indicating a decrease in consumer price pressures in April. Vice Chair of the Federal Reserve, Michael Barr emphasised that the restrictive policy requires more time, dampening expectations for early rate cuts. Additional speeches from Fed officials are expected, including remarks from Barr, as well as Federal Open Market Committee (FOMC) members Thomas Barkin, John Williams, and Raphael Bostic. 


The dollar is struggling to make any significant movements, pending the release of the minutes from the latest Federal Reserve meeting, waiting for further insights into the future path of U.S. interest rates. Softer-than-expected consumer inflation data from last week had raised hopes for rates cuts in the near term, but several Fed officials have continued to stress the need for policy caution. On Tuesday, Fed Governor Christopher Waller indicated that recent economic data shows the Fed’s restrictive policy is effective, while Atlanta Fed Chair Raphael Bostic urged caution to prevent premature rate cuts from leading to pent-up spending and fluctuating inflation. 


Fed Meeting Minutes Signal Caution Amid Inflation Concerns 

The Federal Reserve’s latest Meeting Minutes revealed that the FOMC remains determined to wait for more definitive proof that inflation will ease to 2%, which has dampened risk appetite amongst investors hoping for dovish signals from the U.S. central bank. While the minutes did not explicitly rule out a rate cut in September, investor anxiety is growing over the Fed’s ability to find sufficient data confirming progress towards it 2% annual inflation target. 


Despite expressing disappointment with recent inflation readings, Fed officials at their April 30 – May 1 policy meeting indicated a belief that price pressures would gradually ease, as reflected in the meeting minutes. The current policy stance involves maintaining the central bank’s benchmark policy rate at its current level, although there was discussion of potential future hikes. 


The minutes also highlighted a debate regarding the restrictiveness of current monetary policy given the economy's strength, underscoring the need for sufficiently restrictive measures to curb inflation. Policymakers appear inclined to maintain the Fed's benchmark rate in the 5.25%-5.50% range at least until September, following higher-than-expected inflation in the first quarter of the year. 


As anticipated, the Fed left its monetary policy settings unchanged after the April 30-May 1 meeting. The policy statement noted a recent lack of progress towards the 2% inflation target. Regarding quantitative tightening, the Fed announced a reduction in the Treasury redemption cap to $25 billion per month from $60 billion starting June 1. 


In the post-meeting press conference, Fed Chairman Jerome Powell mentioned that another rate hike is unlikely in the near term but emphasised that it would be prudent to delay interest rate cuts if inflation remains persistent and the labour market stays strong. Powell reiterated the need for greater confidence in inflation moving towards 2% before considering a policy shift. 


Data from the U.S. Bureau of Labor Statistics showed that the core Consumer Price Index (CPI) rose 3.6% annually in April, following a 3.8% increase in March, aligning with market expectations. On a monthly basis, both CPI and core CPI increased by 0.3%, down from 0.4% in March. 


According to the CME FedWatch Tool, markets see little to no chance of a Fed rate cut in June or July, with a 37% probability of maintaining the current policy rate in September. Analysts at TD Securities anticipate that the upcoming minutes will capture attention, particularly the Fed's commitment to a "higher for longer" policy and further details on tapering quantitative tightening. 

 



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