Investors are going to be looking for some clarifications out of the minutes from the last FOMC meeting. The market and the Fed are at odds about the future of rate hikes. More importantly for how the dollar behaves, there is considerable disagreement about what happens at the September meeting. What FOMC members said at the last meeting could clarify that situation, and either push the dollar up, or bring it down.

The issue regarding the supposed “skip” as opposed to a pause seems to be largely settled. There was some initial doubt about it, since Fed Chair Jerome Powell made a point of not calling the lack of action at the meeting as a “skip”. We’ll recall that the main issue around that particular debate was whether or not there was an implication that there would be a rate hike now in the June meeting.

What the market says

Now, over 80% of traders are expecting a rate hike at the next meeting. This comes after Powell gave testimony before Congress, and made comments at the ECB Forum at Sintra saying that two more rate hikes were likely this year. That matches the so-called “dot plot” matrix which is the summary of forecasts by FOMC members. They, too, see two rate hikes this year.

The market, however, disagrees. Only 37% of traders expect two rate hikes this year. The consensus seems to be that the July meeting will have a rate hike, and then the Fed will be done. But, the market has been wrong about the Fed so far; previously the market expected the Fed to quit at or before 5.0%, and the rates are now higher than that. The question is whether the FOMC minutes provide enough force to convince enough traders to switch to believing there will be a second rate hike.

The timing is crucial

The main reason for the disconnect is the differing outlook for the economy. The Fed expects a “soft” landing (that is, a mild recession) that will allow them to keep rates high to bring down inflation. The market forestalls a “hard” landing (that is, a financial crisis) that will force the Fed to cut rates.

The thing is, it’s been over a year now that markets have been forecasting a recession, and time is running out. There are only four more rate decisions for the rest of the year. Since the market is widely agreeing that there will be a rate hike in July and a hold in September, that leaves only the December meeting for there to be a financial crunch severe enough to shake up the Fed.

The potential reaction

So far, US data is not in a good place, but hasn’t outright presented a scenario that would force a rate cut. Therefore, if the FOMC members appear to be confident enough in the outlook, it might be enough for the market to reassess its bets, giving the dollar a boost.

On the other hand, if FOMC members showed that they were concerned about economic indicators and might be open to reassessing the situation, that could grow the majority expecting only one rate hike, and weaken the dollar.

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