Dollar Eases after Fed Confirms Q4 Policy Rethink Possible 

• GBP/USD edges higher following May FOMC minutes
• Hint of two sided risks to market's rate outlook ahead
• Fed's outlook open minded once rates 'neutral' at 2%
• Scope for rethink of rate cycle if inflation comes down

Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The Pound to Dollar rate edged further back above the 1.25 level following the release of minutes from the May Federal Reserve (Fed) meeting, which confirmed that U.S. policymakers could be likely to rethink their interest rate stance if certain economic conditions are met in the months ahead.

Sterling rose by around 50 points while market appetite for the Dollar was dampened following Wednesday’s release of minutes from the May Federal Open Market Committee meeting after which the Fed announced its largest interest rate rise for two decades.

While the meeting record mostly confirmed what had already been well telegraphed in the May press conference and subsequent remarks by Fed officials, there was at least one insight in there that may be informative of the outlook for Fed policy once nearer the final quarter.

“Many participants judged that expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments,” the meeting record states.

Above: Pound to Dollar rate at hourly intervals alongside Dollar Index and EUR/USD. Click image for closer inspection.

The above line is creatively ambiguous in that it could be taken as merely a confirmation of Chairman Jerome Powell’s repeated acknowledgements that the FOMC members would be “prepared to do less” if U.S. inflation rates begin to recede meaningfully in the months ahead.

However, it could also be taken as creating scope and keeping open a door for the Fed to shift its stance on the interest rate outlook in a meaningful fashion later this year following a further uplift in the Fed Funds rate at the June and July meetings that is now widely expected by financial markets.

Federal Reserve Chairman Jerome Powell speaks with @NickTimiraos at the #WSJFuture of Everything Festival https://t.co/RRZfvFeocu

— The Wall Street Journal (@WSJ) May 17, 2022

“At present, participants judged that it was important to move expeditiously to a more neutral monetary policy stance. They also noted that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook,” the meeting record confirmed.

“Participants recognized the need to adjust the stance of policy depending on how these and other factors played out over time,” it also later said.

Above: Selected lines from May FOMC meeting minutes. Click image for closer inspection.

Chairman Powell and others have been clear in recent weeks that the Fed will be responsive to forthcoming inflation figures and have taken care to emphasise to financial markets that they are prepared to lift interest rates more aggressively than currently expected if price pressures build further.

But they’ve also been equally clear they’re prepared “to do less” if U.S. inflation rates begin to fall in a more convincing fashion during the months ahead while Federal Reserve Bank of Atlanta President Raphael Bostic acknowledged just this week the possibility of a pause in the bank’s rate cycle.

“The need to keep raising rates is universally acknowledged at the Fed, but policymakers are alert to tightening financial conditions, and we expect a less hawkish tone to emerge in June. Rates will be increased by 50bp at that meeting, but we think policymakers will open the door to pivoting to 25bp as soon as July,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“We can’t stress enough that the housing data are nowhere near bottom yet, and we doubt policymakers have the stomach to keep hiking by 50bp per meeting in the face of the rollover. The media narrative is now turning very rapidly, and it has further to go,” Shepherdson also said on Wednesday.