The release of the Fed's minutes triggered the short-term strengthening of the US dollar. Two members of the Fed pointed to the risks of inflation rising above target levels. This may happen in the near future before the regulator has time to take the necessary measures.
The comments of the Former Minister of Finance and adviser to the US President Lawrence Summers caused uncertainty in the markets. In an interview, he said that the soft policy of the US regulator, along with the huge stimulus measures, is likely to lead to the emergence of a vicious circle in relation to inflation. In addition, he criticized the new approach of the Fed not to restrain inflation growth even before it overheats.
Economists and the media are now adding fuel to the fire. In their comments, they point to the wrong approach of the Fed in the current situation and assure that the regulator will eventually have to raise the interest rate this year to combat high inflation.
The published minutes from the last meeting show the opposite. Members of the FOMC at the April meeting, discussed the continuation of bong-buying at the current pace until the economy shows "further significant progress" in terms of high employment and the 2% inflation target. Fed officials once again assured traders that the regulator would not hike the key rate in the near future.
Richard Clarida previously noted that judging by the April report from the labor market, the recovery of the economy was again in question. The inflation growth is likely to be temporary, he pointed out. Other Fed officials agree with this.
In any case, the Fed has no significant reason to change the policy. According to primary dealers, it will take about three quarters to complete the quantitative easing program. In another three quarters, the regulator may raise the interest rate. Even if the Fed has a reason to start reducing the quantitative easing program from July 1, the central bank may raise the key rate at the end of 2022.
Notably, investors should pay attention to the bond market and the long-term dynamic of the spread on the yield of 3-month and 10-year treasuries. Usually, before the Fed raises the rate, the spread climbs above 3.5%. Now it is 1.66%. Thus, the indicator should rise twofold at least. Only in this scenario, the Fed may tighten its monetary policy.
It is recommended to take with a pinch of salt media reports or economists' forecasts who are trying to trigger the hype. The situation is quite different. There will be no rate hike in the near future.
Market players seem to have carefully studied the minutes of the Fed's last meeting. Bears again took control over the US dollar on Thursday, sending the US dollar index below the level of 90.00.
The outlook for the US dollar remains negative. This means that in the near future, the US dollar index may roll back to new lows. In the short term, the US dollar index may fall to 89.20, the levels recorded at the very beginning of the year.
Today, US weekly jobless claims data was published. The number of Americans filing new claims for unemployment benefits has fallen again, prompting increased demand for riskier asserts. US stock indexes jumped up.
Meanwhile, the number of unemployed people rose in early May. So, many start to doubt the fast rebound in the labor market at the end of month.
Another report pointed to a slowdown in manufacturing activity in May after manufacturing PMI logged the highest pace in nearly 50 years earlier this spring.
The Philadelphia Fed Manufacturing Index slipped to 31.5 in May from 50.2 in April. Economists predicted that the figure reached 43.0.
