The Fed is definitely more cautious and is not thinking about cuts

Exceptionally, on Tuesday we learned about the records of conversations between American bankers from the Fed meeting that took place at the turn of October and November. The Fed has become much more cautious, pointing to the increasingly stronger impact of previous interest rate increases on the economy. Although many market participants hoped for a stronger pivot from the website Federal Reserve, it plans to keep interest rates unchanged for a longer period of time.

Tight labor market

The Fed's minutes did not surprise investors. Basically, no one expected price increases at the beginning of this month, and looking at the latest communication, no one expects an increase in December. The market basically doesn't give no possibility for further increases and estimates the first reduction in the middle of next year. On the other hand, the Fed is absolutely not thinking about cuts, as evidenced by the publication of minutes.

The Fed sees all the time risk of a rebound in inflation due to the strong economy and tight labor market. Therefore, the Fed most likely plans to keep interest rates unchanged for a longer period of time. It is worth mentioning 2018 and 2019 here. Then the last increase took place in December 2018 and the first reduction in July 2019, but the reduction was caused by a very weak economy, low inflation and global problems. Will any problems now cause the Fed to act faster? It's worth mentioning that inflation still remains above the target and now it will be much more difficult to go down from 3,2% to 2,0% than it was to go down from an almost double-digit level to around 3%.

Chance for further dollar weakening

The market was hoping for a slightly more dovish approach from the Fed, which is partly why the dollar strengthened. On the other hand the outlook for the economy and monetary policy has not changed, therefore there is still a great chance of a decline in yields and a weakening of the US dollar in the coming weeks. It is worth mentioning that today is the last full session on Wall Street. Tomorrow, on Thanksgiving Day, there will be no trading in the US, and on Friday it will be shortened.

As of 09:30, we were paying PLN 4,0171 for the dollar, PLN 4,3780 for the euro, PLN 4,5399 for the franc, and PLN 5,0284 for the pound.

Source: Michał Stajniak CFA, XTB