Greenback Falls After Hawkish Fed Minutes

The USD declined sharply in overnight trading after the Federal Reserve released the minutes for the December meeting. In the meeting, the Fed raised interest rates by 25 basis points. This was the fourth rate hike in the year.

The hike came at a time when the economy was going through major challenges. After rising by 4.2% in the second quarter, the economy slowed to 3.5% in the third quarter. At the same time, cracks in corporate America started to emerge after companies started lowering their expectations. The biggest casualty was Apple, which was then the biggest company in the world. In its earnings release, the company announced that it was ending the release of unit sales. In total, more than 60% companies in the S&P lowered their guidance.

Clouding the space was the never-ending trade conflict between the United States and China. The two countries have been engaging in a trade conflict for months. This has started affecting the US economy and the expectations are that the economy will slow down if it remains. All these issues led to a sharp increase in the volatility.

With all this in mind, investors expected the Fed to leave interest rates unchanged. The US president was increasing his pressure on the Fed. And so did other influential people in the American economy like Doubleline’s Jeff Gundlach. All these factors likely contributed to the rate hike as the Fed tried to show its independence.

In the meeting, the bank issued a forward guidance that showed two more hikes this year. This led to a sharp rise in the USD as investors started fearing high interest rates.

Yesterday’s minutes showed that the bank’s officials were open to leave rates unchanged. In the minutes, they said that since the country is going through a low inflation phase, they were prepared to wait and see. They will also remain steadfast in watching the developments in the economy and make changes when necessary. In the statement, they said:

After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to raise the target range for the federal funds rate to 2¼ to 2½ percent. Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee’s maximum employment and symmetric 2 percent inflation objectives.

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