The minutes of the 3 November FOMC meeting, released on Wednesday, said that various participants noted that the Fed should be prepared to adjust the pace of the QE taper and raise rates sooner than currently anticipated should inflation continue to run hot.
“Some participants suggested that reducing the pace of net asset purchases by more than $15B each month could be warranted so that the committee would be in a better position to make adjustments to the fed funds target range.”
“Participants stressed that maintaining flexibility to implement appropriate policy adjustments on the basis of risk-management considerations should be a guiding principle in conducting policy in the current highly uncertain environment.”
“Participants generally judged that the committee’s criterion of substantial further progress had clearly been more than met with respect to inflation.”
“Some participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases.”
“Participants noted that beginning to scale back the pace of net asset purchases was not intended to convey any direct signal regarding adjustments to the target range for the federal funds rate.”
“Participants cited upside risks to inflation, including those associated with strong demand for goods and a tight labor market.”
“A few participants cited a number of factors representing potential vulnerabilities to the financial system, including elevated asset valuations and the growing exposure of banks to nonbank financial firms.”
“On inflation expectations, a number of participants discussed the risk that the public’s longer-term expectations of inflation might increase to a level above that consistent with the bank’s 2.0% target.”
“Participants generally saw the current elevated level of inflation as largely reflecting factors that were likely to be transitory.”
“Participants judged that inflation pressures could take longer to subside than they had previously assessed.”
After an initial two-way reaction, the Dollar Index (DXY) has pushed back towards fresh session highs in the 96.90s in wake of the FOMC minutes. The minutes allude to the hawkish shift taking place at the Fed even before the release of the October Consumer Price Inflation report on 10 November, which is likely why the dollar is finding some support. “Various” participants support a potential acceleration of the QE taper and rate hikes and “a number of” committee members are growing worried about longer-term consumer inflation expectations.