Fed likely to hike rates in September

Next Release: 08 April, 2015
Currencies: EUR/USD, USD/JPY

The minutes of the U.S. Federal Reserve policy meeting held on 27 and 28 January were released on Wednesday. The policymakers were concerned that tightening of the monetary policy could damage the economy and reduce the possibility of achieving inflation target of 2 percent.

"I think it's probably much more dovish than anybody anticipated, that's for sure," said Greg Peters, senior investment officer at Prudential Fixed Income. "I think June is going to be hard for them to move, but that's not to say they won't."

However, the policy makers have signalled that the central bank is thinking of June as the month to start hiking interest rates. The minutes highlight the profundity of the Fed's inflation debate and underscore the desire to keep the rates lower for longer.

But "it looks increasingly likely that the Fed will wait longer," economist Paul Edelstein of IHS Global Insight wrote in a note to clients.

Economists view September as the month when the Fed will start to hike rates. They expect weak inflation figures later this year, due to the sharp fall in oil prices since June 2014. So, rate hike is expected to be postponed until the fall.

"If you have an economy that's gradually accelerating and inflation that's picking up in the second half of the year, then you would expect a rate hike around September," said Gregory Daco, chief U.S. economist at Oxford Economics.

For the first time since January 2013, the Fed noted the overseas economic events and said that it would take the "financial and international developments" into consideration, with particular reference to China's slowdown, tensions in the Middle East and Ukraine.

The dollar fell against the yen and euro on Thursday, after the release of disappointing Fed meeting minutes. USD/JPY slipped 0.2 percent to 118.58, after hitting a high of 119.41 overnight. EUR/USD rose 0.2 percent to 1.1422, pulling back from previous day's low of 1.1334.

"The euro is quite stable amid the Greek risk...the immediate focal point is how risk assets fare going forward, as they have performed relatively well despite Greece. Heightened risk appetite may eventually prompt players to cover euro shorts," Ishikawa at IG Securities said.