Federal Reserve officials highlighted the challenges ahead during their latest May 6-7 meeting. Minutes released recently revealed concerns over rising inflation occurring alongside increasing unemployment—a difficult dilemma that may force tough policy decisions in coming months.
The Fed staff projections included a heightened risk of recession, reflecting the central bank’s cautious stance. Policymakers must now choose between tightening monetary policy to fight inflation or easing rates to support economic growth and employment.
Market Reaction: Dollar Stays Strong Amid Fed Caution
Following the release of the Fed’s Minutes, the U.S. Dollar Index (DXY) remained near the key psychological level of 100.00, supported by a modest rebound in U.S. Treasury yields. The market is pricing in steady interest rates for now, with limited expectations of rate cuts in the near term.
Ahead of the Minutes release, the Fed maintained its benchmark interest rate in the 4.25%-4.50% range, as widely expected. The Fed continues its “wait-and-see” approach, refraining from signaling any imminent changes to the policy stance.
Fed’s Hawkish Tone Influenced by Trade and Inflation
Early this year, the Federal Reserve adopted a hawkish stance, partly due to concerns over tariffs imposed by former President Trump, which complicated inflation expectations.
Chairman Jerome Powell acknowledged that tariffs are a significant factor behind increased inflation but noted uncertainty about exactly how much impact they have. Powell emphasized the Fed’s attentiveness to risks on both inflation and employment fronts, underscoring the complexity of upcoming policy decisions.
Moreover, the Fed has slowed the reduction of its securities holdings, cutting the monthly Treasury roll-off from $25 billion to $5 billion starting in April, to avoid tightening financial conditions too rapidly.
Powell also highlighted that the new administration’s policies on trade, immigration, fiscal measures, and regulation will collectively influence economic conditions and the Fed’s future actions.
FOMC Minutes Release and Dollar Outlook
The FOMC Minutes from the May meeting were released at 18:00 GMT on Wednesday, with investors eager for clues on the Fed’s policy path. However, since no major surprises are expected, the impact on the U.S. Dollar Index may be limited.
Market tools like the CME FedWatch Tool indicate that traders are not expecting rate cuts in June or July, assigning roughly a 48% chance of a 25 basis-point cut only by September.
According to Valeria Bednarik, Chief Analyst at FXStreet, the DXY remains just above its multi-month low near 97.91. Technical indicators suggest downward risk, with strong resistance near 100.20 and limited buying interest to push significantly higher.
Bednarik explains, “A break below the May low at 98.70 could expose the April bottom at 97.91 and further downside toward 97.50.” This technical setup suggests that unless the Fed signals a shift, the Dollar may remain under pressure or range-bound in the near term.
