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At the final meeting chaired by Jerome Powell, the Fed held interest rates at the benchmark federal funds rate in a range between 3.5%-3.75%, its lowest rate since November 2022. This marked the third straight meeting that the Fed has kept rates unchanged.
Fed Vote Sends Hawkish Message in Split Vote
The Fed was unusually divided in its decision at the meeting, with an 8-4 split – the last time four FOMC members dissented was in October 1992. The split vote reflects a high level of disagreement among FOMC members with regard to the direction of monetary policy. The majority held that a rate hike could be needed if the Iran conflict continues to drive prices higher. Three members wanted the rate statement to be even more hawkish, while one member voted to lower rates.
The minutes noted that inflation has “run significantly above 2% over the past five years” and “further increases in inflation likely to occur as a result of the conflict in the Middle East”, leading the members to view the upside risk of inflation has higher than previously expected. The rate statement from the meeting was even more explicit, noting that “tighter policy would be appropriate if inflation continued to run above 2%.”.
Inflation is clearly public enemy number one for the Fed. Consumer inflation is running at an annual pace of 3.8%, and wholesale prices hit an annual rate of 6% in April, the hottest reading since December 2022. With the Fed admitting that the battle against inflation is in full force and a rate hike is on the table, the markets have raised the probability of a rate hike in late 2026 or early 2027.
The US dollar has looked solid in the month of May, gaining ground against all the major currencies. The Iran war, which has sent oil prices above $100/barrel, has weighed on risk appetite, which has boosted the safe-haven US currency. As long as the conflict continues, the US Dollar should be able to hold its own against the majors, but a resolution to the conflict will almost certainly lift risk sentiment, which would be bearish for the greenback.
US Dollar Slightly Lower, Stock Market Sharply Higher
The US dollar has showed limited movement against the majors on Thursday in response to the Federal Reserve minutes. The lone exception is the AUD/USD currency pair, which is down 0.57%, trading at $0.7111.
Stock markets posted strong gains on Wednesday.
The Nasdaq 100 Index jumped 478.85 points (1.66%) and closed at 29,297.70.
The S&P 500 Index gained 79.36 points (1.08%) and closed at 7432.97 points.
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