FOMC minutes contained a strong message to the markets – BBH

Analysts at Brown Brothers Harriman & Co. (BBH) maintain a bullish outlook for the US Dollar in the wake of a generally hawkish tone from the FOMC meeting minutes released on Wednesday.

Key Quotes:

“We continue to believe that dollar weakness in late 2022 was overdone and we expect the greenback to claw back much of those losses in the coming weeks and months. Of note, ECB and BOE tightening expectations have fallen in recent days and we see room for Fed tightening expectations to move higher, especially after the strong message contained in the FOMC minutes.”

“There were quite a few passages referring to balancing two-way risks and keeping the policy outlook flexible. However, we believe the key takeaways come from the following: “A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.” That is, the Fed was concerned that markets would misunderstand and take the decision to downshift to 50 bp as a pivot away from its inflation fight.  Clearly, it wasn’t.”

“Furthermore: “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability.” That is, the Fed does not want looser financial conditions due to any such misunderstanding. Since that December 13-14 meeting, financial conditions have tightened a bit. The 10-year yield has risen over 20 bp, high yields spreads have widened nearly 30 bp, and the S&P 500 has fallen around 5%. We believe that the Fed minutes serve notice that markets would do well not to underestimate the Fed’s resolve.”