Pointers
- Whilst the FOMC minutes helped lift the dollar and Wall Street on the day, we’re not convinced the dollar low is in just yet.
- The Greenback was broadly higher overnight as the FOMC minutes confirmed the Fed will hike rates by 50-bps at their June and July meetings.
- Wall Street also closed grander as the minutes provided some comfort that the Fed thinks the economy is strong and can raise rates without triggering a recession.
- We’re questioning whether the Fed really can docile eye-watering levels of inflation without triggering a rough landing.
The Fed minutes have verified ‘most participants’ are on board to raise by 50-bps at their next two meetings. This would be their third 50-bps hike in as many meetings and take interest rates to 2% by July. With inflation risks ‘skewed to the upside’, markets are pricing in rates to finish the year at 2.75%, although only with a 58.9% – likelihood. And that is because we’re all questioning as to whether the Fed really can tame eye-watering levels of inflation without triggering a hard landing.
The minutes also lifted concerns that if inflation expectations remained elevated it would become difficult to guide inflation back down to 2%. The Fed may find themselves treading on eggshells by September, as they’re aiming to tame hot inflation whilst targeting a soft landing within a low-growth environment.
And that is going to make today’s GDP revision of great interest, after the initial release saw growth unexpectedly contract by -1.4%. The Fed will be crossing their fingers for Q1 GDP to be upwardly revised today, because another print of -1.4% or worse could aggravate concerns of stagflation. We already heard Bostic saying this week that they may need to take a pause [from hiking rates] in September. It’s therefore interesting that the minutes stopped shy of being so confident of 50-bps hikes after July.
Remember, the Fed don’t simply announce policy U-turns. So if we hear a growing chorus of other members mentioning a potential pause around September, we know the Fed are getting cold feet. And who could blame them, with consumer confidence at multi-year lows and cracks appearing in the rendering of the housing sector.
Gains for the dollar where underwhelming, considering how hawkish the Fed are. So there may have been some short covering in there, but upside volatility was underwhelming to say the least. We expect NZD to recoup much of its lost ground after the RBNZ lifted their OCR forecast to 3.9% by the year end.
