The FOMC still firmly believe they are still on target for further interest rate hikes in 2017 with the likely time of execution being December.
Last month the committee announced plans to begin tapering their asset purchasing scheme in order to gradually reduce the US’s mounting balance sheet.
US inflation a key concern for the FOMC
Whilst it is very unlikely the current weak inflation figures will scupper the chances of another interest rate hike in December it remains a key concern for the FOMC and will surely affect the rate at which tapering is delivered. In August the annualised CPI rate 2%, whilst core inflation which includes food and fuel pricing only reached 1.75%
Reduction of the US balance sheet
As announced last month the FOMC are keen on reducing their $4.5 TRL asset portfolio. Its directive is to reduce the balance sheet by $10 Billion each month commencing this month, increasing by ten billion until it reaches fifty billion Dollar monthly tranches. Once this objective is reached and subject to the reaction of the economy it will continually reduce in order to gradually clear its balance sheet.
US jobs market
The FOMC remains upbeat about the US labour market and despite the setback delivered by hurricanes Irma and Harvey which distorted Augusts figures. Jobs markets continued to strengthen in July and August with good growth in the private sector and declines in Government roles.
Unemployment remains on target
Unemployment rates reached 4.3% and 4.4% in July and August and remain around the FOMC’s the target. Currently, US Unemployment sits at a 16-year low.
Markets reaction to FOMC minutes
Before the FOMC minutes release FX markets remained flat as investors anticipated its effect. For example, GBP/USD traded within a range of 1.3180 to 1.3220. Policies continual concerns around the state of US inflation rippled through markets which in turn saw the GBP/USD appreciate to around the 1.3260 levels.
EUR/USD traded in a tight trading range pre- and post FOMC meeting minutes. Following the release of the minutes, EUR/USD rose ever so slightly from 1.1730 to a day close of 1.1766.
Future interest rate hikes
Although September’s FOMC meeting delivered very few surprises its admission that some members were less convinced by further interest rate hikes this year will surely entice investors into other currencies and therefore weaken the USD. In particular, as the thriving job market is not having positive effects on inflation levels.
With this being said the possibility of a December rate hike remains very likely. The focus will now turn to the next round of USD data.