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Forex News – Federal Reserve apprehensive of raising rates too quickly

XM Markets UUIIFXBR
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The minutes of the Federal Reserve January 27/28 meeting were released yesterday and overall they showed a committee with some concerns about the economic outlook and whether US interest rates can rise soon.

One of the main takeaway points from the minutes is that most Fed members prefer to wait in raising interest rates – perhaps risking possible negative side effects such as inflation or asset bubbles – rather than raising rates too quickly which could hurt the US economic recovery.  This comment does make one wonder how strong the US economic recovery really is, if monetary policy normalization still cannot take place.  Low inflation and low expected inflation was another concern for the committee and certain members said that inflation indicators would have to rise before action is taken.

The Fed minutes went against what some recent Fed speakers and the statement itself from that meeting seemed to indicate; mainly that the Fed was preparing for higher rates.  The possibility of higher interest rates does not seem to be something that the Fed is contemplating right now – at least in the short-term.

Interestingly, the minutes also contained some analysis pertaining to the US dollar.  Strength in the US dollar has had a negative impact on US exports, according to the minutes.  While that may sound like stating the obvious, statements like this could provoke some reaction by US policymakers against further strength in the greenback.  The rising dollar has acted like a gentle break on the US economy, which has allowed the Fed to keep interest rates near zero despite decent economic growth and lower unemployment.

Following the minutes’ announcement, euro / dollar jumped from 1.1340 approximately to around 1.1405, while dollar / yen dropped from 119.25 to around 118.60.  The odds of a rate hike in June fell to 20% from around 25% the day before the minutes, according to futures markets.

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