To put a long story short, the latest FOMC minutes were more hawkish than expected on a number of fronts. Echoing hawkish statements made by Fed governor Christopher Waller last December, all participants favoured beginning quantitative tightening (QT) sooner after the first rate hike than last time and many judged that the runoff should proceed faster. In other words, the Fed seems to be more strongly leaning toward more aggressive quantitative tightening, which even though Waller did hint at this in December, seems to have surprised some. Meanwhile, some Fed participants remarked that there could be circumstances in which it would be appropriate for the committee to raise interest rates even before full employment had been reached. This is the first time since the Fed’s 2020 framework review when Fed members have favoured sacrificing progress to its employment goal to meet the inflation goal. For a full summary of the minutes, click here.

For now though, even though US bond yields, particularly at the short-end have been rallying in wake of the minutes, the USD bulls remain shy. For reference, US 2-year yields are now up 6bps on the day and decisively breached 0.80% for the first time in the post-pandemic era. 5s were up over 5bps to above 1.40%, which put them back at pre-pandemic levels for the first time. Longer-term US yields, the 10s and 30s, were little moved, however, which could explain the lack of enthusiasm seen in USD. 10s gained about 1bps in the aftermath of the minutes, but are struggling to get above 1.70%, while the 30s have actually moved about 1bps lower since the release.

The lack of enthusiasm to push long-term yields higher in tandem with short-term yields in wake of the hawkish minutes suggests that bond market participants are not convinced that the more aggressive approach toward rate hikes and balance sheet reduction constitutes long-term economic growth maximizing policy. Bond markets may need to show a little more faith in the Fed’s ability to tigthen without hurting long-term growth (thus pushing longer-term yields higher) for the dollar to rally on a sustainable basis.