The Fed is not shying away from a three-quarter percentage point rate increase this month, if the FOMC minutes are any guide.
The dollar bloc central banks were unified in signalling “the potential need for more forceful tightening in order to address inflation risks”.The minutes of its June meeting released on Wednesday revealed the hawkish thinking behind its decision to raise the Fed funds rate to 1.5 per cent-to-1.75 per cent, promising further increases.
"Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognised the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist," the text of the minutes said.
The Fed agreed that the obvious risk to increasing interest rates is that economic growth slows, but it “saw the return of inflation to 2 per cent as critical to achieving maximum employment on a sustained basis”. The US dollar appreciated following the Fed minutes, guided by both the Fed’s mood and the global economy’s perceived vulnerability to recession, pushing the Australian dollar to US67.62¢ – a two-year low, according to Westpac – and the greenback to a fresh 20-year high.
The US two-year yield, which is sensitive to near-term expectations around interest rates, tapped 2.97 per cent, up from 2.76 per cent, and the 10-year returned to 2.92 per cent from 2.74 per cent.A key survey of the US services sector was substantially more bullish than last Friday’s survey of the manufacturing sector conveyed. The Institute for Supply Management’s June services snapshot fell to 55.3 from 55.
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