USD/JPY Rallies After Fed Releases FOMC Minutes

This Wednesday, the Federal Reserve released its Federal Open Market Committee minutes. Unlike previous FOMC meetings, the decision to keep rates unchanged was not unanimous and Thomas Hoenig voted against the policy action. According to the minutes “Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to “warrant exceptionally low levels of the federal funds rate for an extended period.”

In recent months, economic and financial conditions improved steadily, and Mr. Hoenig was concerned that, under these improving conditions, maintaining short-term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express an expectation that the federal funds rate would be low for some time–rather than exceptionally low for an extended period. Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the risks of longer-run imbalances and an increase in long-run inflation expectations, while continuing to provide needed support to the economic recovery.” The US dollar reacted positively to the minutes judging by the initial rally on the USD/JPY exchange rate.