US Dollar Retreats Despite FOMC Minutes Plotting Out Course to Next Hike

Federal Reserve officials have said they may need to raise interest rates "fairly soon" if the economy stays strong, minutes of their meeting show.

On early Thursday, however, the USA dollar somewhat recovered following overnight losses after market participants digested the latest Fed minutes.

When the Federal Reserve boosts the benchmark federal funds rate, it has an impact on interest charged borrowers on things like credit cards, personal loans and home equity lines of credits.

At the same time, "many" policymakers "continue to see only modest risk" that the unemployment rate would substantially fall below the Fed's target.

Investors now await for details from U.S. President Donald Trump on possible proposals on tax cuts, looser regulations and infrastructure spending, traders said. Since 2012, the Fed chair has conducted a press conference after four of the Fed's eight yearly meetings - the ones that include new quarterly releases of Fed officials' economic projections.

According to the minutes "a couple" of Fed policy makers expressed their concern that the Fed's "communications about a gradual pace of policy firming might be misunderstood as a commitment to only one or two rate hikes per year".

"Although U.S inflation has risen, the expectation of a rate hike in March is not very high", said Jiang Shu, chief analyst at Shandong Gold Group.

Given their own inability to second-guess what effect Trump's policy changes might have on the U.S. economic outlook, Fed policy makers seemed to marvel that investors had adopted such an optimistic view of their likely impact.

But not everyone thinks "fairly soon" means a March move. In fact, Williams said in an interview on February 3 that it might make sense for the Fed to increase borrowing costs next month given the performance of the economy.

"The dollar rally that preceded Yellen's testimony wasn't given more fuel so we are seeing that move fade", said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago.

A quicker pace of monetary tightening would render dollar-denominated liquidity dearer in global markets, and domestic USA credit more expensive as well, potentially helping stave off the alarming trends in mounting U.S. household indebtedness.

The documents also showed the Fed discussing when to start unwinding its $4.5 trillion balance sheet of mortgage-backed and Treasury securities, which it acquired in an effort to ease lending and stimulate the economy after the financial crisis.

  • Zachary Reyes