As expected the minutes of the July 25-26 FOMC meeting highlighted a broad division among Fed members. More specifically, the timing of the balance run-off was a major topic of discussion as several members were willing to pull the trigger last month, while the majority preferred to wait. Indeed, one reads “several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook”.
In addition, the minutes showed that despite the strengthening of the jobs market, many members were worried about inflation levels. The minutes said “Many participants saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside”.
All in all, the minutes were broadly in line with the June version, although some market participants construed them as dovish, I think that the September still is the key meeting as the Fed will announce the timing of the balance unwinding, while tightening borrowing cost in December.
Despite tumbling in the aftermath of the release of the minutes, the US dollar has reversed losses on Thursday morning amid a broad risk-off move. The uncertainties generated by Trump’s political jitters, together with worries about the upcoming ECB meeting in early September has helped the greenback to regain traction.
By Arnaud Masset