The U.S. dollar is maintaining strength on Thursday against a basket of currencies after rising to a three week high yesterday against the Japanese yen following the release of the April Fed Minutes that showed committee participants at the Fed Reserve are more willing to consider an interest rate hike at their June meeting.
The Fed minutes pointed out that inflation is showing strength despite earlier declines in energy prices and falling prices of non-energy imports.
Although the 12-month change in core PCE prices continued to run below the Fed’s 2 percent target, it moved up to 1.7 percent in January and February from 1.4 percent at the end of 2015.
“In addition to the ongoing tightening of resource utilization, the recent depreciation of the dollar and the firming in oil prices suggested that the downward pressures on both core and headline inflation from declining prices of non-oil imports and energy should begin to subside,” according to Fed minutes.
Federal Reserve participants are watching global developments that could result in downside risks.
“Also, many participants noted that downside risks emanating from developments abroad, while reduced, still warranted close monitoring. For these reasons, participants generally saw maintaining the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting and continuing to assess developments carefully as consistent with setting policy in a data-dependent manner and as leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting” according to Fed minutes.
As long as economic data continues to hold steady during the next several weeks, the likelihood increases for a rate hike at the Fed’s June meeting.
“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June” according to the Fed minutes.
There were competing views expressed about global headwinds with some participants seeing risks to the economic outlook as balanced whereas other Fed participants pointed to downside risks on the horizon due to the possibility of the Chinese yuan being devalued again besides spillover risks associated with a Brexit vote on June 23rd which comes after the Fed’s June FOMC meeting from June 14-15th with a press conference at the conclusion of the meeting with Fed Chair Janet Yellen.
“Several FOMC participants judged that the risks to the economic outlook were now roughly balanced. However, many others indicated that they continued to see downside risks to the outlook either because of concerns that the recent slowdown in domestic spending might persist or because of remaining concerns about the global economic and financial outlook. Some participants noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China’s management of its exchange rate” according to the Fed minutes.
Based on CME data using a Fedwatching tool about rate hikes, the probability of a rate hike at the June meeting has risen to 34 percent, up from 19 percent before the release of the April Fed minutes.
The probability of a July rate hike has risen to 56 percent, 66 percent in September, and 80 percent in December.
Later today, speeches today by Federal Reserve Vice Chair Stanley Fischer and New York Fed President William Dudley are expected to provide more insight about how the Federal Reserve may approach a rate hike in June.