Fed Minutes Preview: Markets to focus on rates outlook as strong labor market diminishes urgency for cuts

• The Fed will release the minutes of the March policy meeting on Wednesday.
• Jerome Powell and co’s discussions surrounding the policy pivot will be scrutinized.
• Markets see a nearly 50% probability of another Fed policy hold in June.

The Federal Reserve (Fed) will release the minutes of the March policy meeting on Wednesday. Investors will pay close attention to comments regarding the inflation outlook and the possible timing of a policy pivot.

Fed faces a tough policy decision in June

The Fed left unchanged its monetary policy settings following the March 19-20 policy meeting as expected. The revised Summary of Economic Projections, also known as the dot plot, showed that policymakers were still projecting a total of 75 basis points (bps) reduction in the policy rate in 2024. 

In the post-meeting press conference, Federal Reserve Chairman Jerome Powell repeated that they need “greater confidence” of inflation moving toward the 2% target in a sustainable way before starting to cut interest rates. Although markets saw a strong probability of a policy pivot in June, hawkish comments from Fed officials since the March meeting and the impressive labor market data caused investors to reassess the rate outlook.

Atlanta Fed President Raphael Bostic noted that he was expecting the US central bank to lower the policy rate once this year, most likely in the last quarter. On another note, “I believe it’s much too soon to think about cutting interest rates,” Dallas Fed President Lorie Logan said, citing upside risks to inflation. Additionally, Minneapolis Fed President Neel Kashkari said that he pencilled in two interest rate cuts this year and added: "If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all."

Meanwhile, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose 303,000 in March, beating the market expectation for an increase of 200,000 and highlighting the persistent strength of the labor market. 

Following the hawkish Fed commentary and March jobs report, the probability of a June rate cut declined toward 50% from above-60% earlier in the week, according to the CME FedWatch Tool.

Previewing the March Federal Open Market Committee (FOMC) Minutes “the FOMC opted again for patience at its March meeting as it continues to look for evidence that provides ‘greater confidence’ around inflation moderation. Fed officials also stuck with their median projection of 3 rate cuts for this year, despite upgrading most macro projections for 2024,” TD Securities analysts said in a note. “Debates about the short-term policy outlook and QT tapering will garner most attention,” they added.

When will FOMC Minutes be released and how could it affect the US Dollar?

The Fed will release the minutes of the March policy meeting at 18:00 GMT on Wednesday. Although investors are likely to pay close attention to this publication, its impact on the USD’s valuation could remain limited because the BLS will release the Consumer Price Index (CPI) data for March earlier in the day, which is likely to have a more significant effect on the market pricing of the Fed’s policy outlook.

Nevertheless, in case the FOMC Minutes show that some policymakers remain optimistic about the inflation outlook and still favor a rate cut in June regardless of the stronger-than-expected CPI data for January and February, the USD could face some bearish pressure. On the other hand, the USD is likely to gather strength against its rivals with the immediate reaction if the publication suggests that officials are likely to delay a rate cut as long as labor market conditions remain tight.

Eren Sengezer, European Session Lead Analyst, shares a brief technical outlook for the USD Index:

“The 200-day Simple Moving Average (SMA) aligns as key support for the USD Index (DXY) at 103.80. In case the index falls below that level and starts using it as resistance, 103.40 (100-day SMA) could be seen as next support before 102.35 (March 8 low). On the upside, the Fibonacci 61.8% retracement of the October-December downtrend aligns as first resistance at 104.70 before 105.00 (static level) and 105.80 (Fibonacci 78.6% retracement).”