Investors were impatiently waiting for clues about the Fed’s thinking. Quite the contrary, the minutes of the last FOMC meeting showed a highly-divided committee, increasing the overall uncertainty about the timing of the next interest rate hike and the beginning of balance sheet unwinding programme.
The committee noticed that the labour market continued to strengthen together with the economic activity, the latter improving at a moderate pace though. FOMC members acknowledged both headline and core inflation measures came in below their anticipation but “viewed the recent softness in these price data as largely reflecting idiosyncratic factors” and added that it will have little bearing effect on the medium-term. However, some participants appeared quite concerned about the downside risk in inflation and raised doubts about reaching the 2% target, suggesting that dissent started to appear within Fed presidents.
We reiterate our view that the weakness in inflationary pressures that has emerged at the beginning of the year will force the Fed to slow down the pace of monetary tightening. Therefore, we expect only one other rate hike this year, most likely in December. We also anticipate that the Fed will wait until December to announce the timing of the balance sheet reduction, which will most likely start at the earliest in the second half of 2018.
Given the lack of new information provided by the minutes, the USD was little changed on Thursday. EUR/USD consolidated around 1.1350, still trading with a negative bias as investors catch their breath after last week's euro rally. The pound sterling moved in a similar fashion as markets awaited fresh news regarding the Brexit negotiations, with GBP/USD treading water below the 1.30 threshold.
By Arnaud Masset