FOMC Minutes: June Rate Hike More Than Likely, Dollar Moves Up

The minutes from the April FOMC meeting are out and not everyone is pleased with the content. The minutes increased the likelihood of an interest rate hike, sending the dollar higher Thursday and confusing Asian markets.

Fed officials intimated that a rate increase in June was a strong possibility if the economy continues to grow when they last gathered to discuss the economy at their April 26-27 policy meeting. Strong economic data released recently may move the central bank to raise interest rates sooner than later.

Traders in futures markets were certain that the Fed would not make the move at its upcoming June meeting and changed course after the minutes were released, putting a 34 percent probability on a June increase and a 56 per cent probability on a move by July.

The minutes reported that “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 [Fed’s] 2% objective, then it likely would be appropriate for the [Fed] to increase the target range for the federal funds rate in June.”

Global Reaction

Global markets reacted immediately to the news. The Dow Jones Industrial Average (DIA) dropped by more than 180 points, then rallied late into the day and finished nearly flat. In Asia, Japan’s benchmark Nikkei 225 index was flat but all other markets were lower. Australia’s S&P/ASX 200 fell 0.68 per cent, Hong Kong’s Hang Seng Index shed 0.84 per cent and South Korea’s Kospi was down 0.53 percent. The mainland markets bucked the trend with the Shanghai Composite up 0.50 percent after wavering between positive and negative, and the Shenzhen Composite up 1.35 percent.

The dollar index, which measures the U.S. dollar against a basket of currencies, traded at 95.150 at 10:22 a.m. SIN/HK time, hitting levels above 95 in the U.S. session for the first time in close to a month.