The US dollar received a boost after the Federal Reserve released the minutes from its January 31–February 1 meeting. During the meeting, the central bank raised its benchmark rate by 25 basis points to 4.50–4.75% in an effort to bring inflation back to the bank’s 2% target. The minutes showed that the central bank will continue to tighten monetary policy in the future in order to achieve its inflation target.
The record of the proceedings indicated that most FOMC participants supported slowing down the pace of interest rate increases. However, some officials favored more front-loaded measures. Policymakers noted that while CPI readings have moderated, there are still risks that are biased to the upside and that restoring price stability will take time and require more rate hikes.
The minutes also showed that some participants believed there was an elevated risk of recession in 2023, and that the balance of risks to the economic outlook was skewed to the downside. Despite these concerns, the consensus among officials appears to be that the central bank’s job is not yet done.
Following the release of the minutes, bond yields edged higher, boosting the US dollar, with the DXY index up about 0.34% near two-week highs. The FX and fixed-income markets are expected to see further movements in the coming days as traders adjust to the fact that the Fed will stay its current course.
US Dollar to Benefit from Fed Inflation Targeting Actions in the Near Term
For monetary policy, this means that the terminal rate could settle around 5.375% this summer and remain there until there is sufficient evidence that inflationary forces are subsiding on a sustained basis. While the central bank is aware of the risks, it will continue to take steps to achieve its inflation target, which will likely support the US dollar in the near term.
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