Dollar Hits One-Week High as Fed Minutes Reveal Rate Cut Doubts
Internal division among FOMC officials over the timing of monetary easing prompts markets to scale back bets on aggressive 2025 rate cuts.
The U.S. dollar strengthened on Wednesday after minutes from the Federal Reserve’s December meeting revealed a growing caution and division among officials regarding the timing of future interest rate cuts, prompting a broad recalibration of market expectations for 2025.
The detailed account of the Federal Open Market Committee's (FOMC) latest policy discussion showed that while policymakers generally agree that the peak of the tightening cycle has passed, significant uncertainty remains about when to begin easing. The minutes highlighted a debate between officials who believe rates are sufficiently restrictive to bring inflation to heel and those concerned that premature cuts could undermine progress.
This sentiment was echoed in a Bloomberg report which pointed to the internal disagreement as a primary reason for markets to anticipate a rate pause in the upcoming January meeting. The lack of a clear-cut consensus on the path forward poured cold water on the market's recent dovish enthusiasm.
Investors reacted swiftly to the more measured tone. The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, rallied to a one-week high of 98.311. The move signaled that traders were unwinding bets on a rapid succession of rate cuts beginning early in the new year. The dollar's rise came as a direct response to the perception that the Fed is in no rush to lower borrowing costs.
U.S. equity markets edged lower on the news, with the prospect of a "higher for longer" interest rate environment weighing on sentiment. The S&P 500 slipped 0.14%, while the tech-heavy Nasdaq Composite saw a decline of 0.24% as investors took profits after a strong year-end rally.
The bond market, which had priced in as many as six rate cuts for 2025 just weeks ago, also reflected the shift in sentiment. The yield on the benchmark 10-year Treasury note, which moves inversely to its price, held firm around 4.127%, pausing a recent decline that was predicated on a more aggressive Fed pivot.
According to the minutes, several participants noted that circumstances might warrant keeping the federal funds rate at its current restrictive level for longer than anticipated. Others pointed to the risks of holding rates too high for too long, underscoring the delicate balance the central bank must strike between taming inflation and avoiding an economic downturn.
With the market now pricing out the likelihood of a cut at the FOMC's next meeting, all eyes will turn to upcoming inflation and employment data. These reports will be critical in shaping the committee’s debate and determining whether the central bank begins its easing cycle in the spring or holds its policy stance steady into the summer.