FOMC minutes revealed that the Fed's interest rate projection will likely reach more than 5 percent this year.

The US dollar index (DXY) opened lower in early trading Thursday (5/January). The release of the FOMC meeting minutes in the early morning presented the Fed's hawkish policy projections, the same as the announcement after last month's meeting. However, market players doubt it. The greenback was beaten again against the euro and yen.

us dollar

 

Remaining Focused on Controlling Inflation

All participants in the FOMC meeting on December 13-14, 2022, agreed that the US central bank needs to reduce the intensity of interest rate hikes. At the same time, they emphasized that they would continue to keep interest rates high to reduce the inflation rate.

Participants at the FOMC meeting emphasized the importance of "flexibility" and "optionality" in policymaking, as interest rates may need to be raised even further if inflation rates remain high. They also hope that market players will not perceive the slowdown in interest rate hikes as a dovish attitude.

"The participants (FOMC meeting) reaffirmed their strong commitment to returning inflation to the Committee's (FOMC) target of 2 percent," the minutes stated. "Several participants stressed that it was important to communicate clearly that the slowdown in the pace of rate hikes was not an indication of weakening the Committee's resolve to achieve its price stability target."

"Neither participant considered it appropriate to begin reducing the Federal interest rate target in 2023," the minutes concluded.

In conclusion: The Fed will likely raise interest rates by 25 basis points (or higher) at its next meeting on January 31-February 1. Meanwhile, the Fed has blatantly denied market speculation about the prospect of a rate cut in 2023.

 

Indifference Market

The Fed's current interest rate is in the range of 4.25%-4.50%. Dot Plot projections from the December 2022 FOMC meeting suggest the possibility of rates increasing to a peak of 5.1% in 2023, then remaining at those levels for some time.

The FOMC minutes presented the same thing, accompanied by various supporting arguments. However, market players and some economists still consider the Fed's projection too optimistic. They believe the Fed will change direction in the next few months after upcoming data reveals the deteriorating US economic situation.

"Our view remains that rapidly declining inflation, combined with a sharp decline in employment growth, will shift the (US economic) landscape dramatically in the first half of the year," said Paul Ashworth, North America Chief Economist at Capital Economics. "The last 50 (basis points) in the first quarter brought the Fed rate to a peak near 5%. We expect the Fed to cut rates before the end of this year."

John Kicklighter from DailyFX also said that market players still think the Fed will be dovish this year. He pointed to the US Treasury 2Y bond yield data, which only increased slightly. At the same time, the Fed Funds Futures for February and June indicated that market expectations of interest rates had not changed.

"Looking at the Summary of Economic Projections (SEP) released alongside last week's policy decision, the Fed projects the benchmark interest rate (to peak) at 5.1 percent, with 17 of 19 voting for the key rate to be above 5.0 percent by the end of the year (2023) However, from Fed Funds Futures, we can see that the market continues to project a view that is not as high as the official projection," said Kicklighter.