Fed Minutes expected to shed light on the depth of FOMC hawkish split

• The Fed Minutes are expected to reveal the extent of support for higher interest rates after three dissenting votes in July.
• Softer inflation and labor market data since the meeting support the case for keeping rates unchanged in September.
• Markets currently see a 34% chance of a September rate hike, down from around 60% three weeks ago.

The United States (US) Federal Reserve (Fed) will release the Minutes of the July Federal Open Market Committee (FOMC) meeting on Wednesday. The document should allow investors to assess the extent of the hawkish bias within the central bank after a meeting marked by three dissenting votes in favor of a rate hike.

The Fed left the Fed Funds rate unchanged in the 3.5%-3.75% range in July, as widely expected. However, three officials, regional Fed Presidents Lorie Logan, Beth Hammack and Neel Kashkari, voted for a 25-basis-point (bps) rate increase, highlighting growing divergences within the Committee.

The monetary policy statement was broadly unchanged from June and provided no explicit guidance about future decisions. This limited communication is consistent with Fed Chair Kevin Warsh's preference for reducing forward guidance and preserving greater flexibility from one meeting to the next.

The Minutes will therefore be closely scrutinized to determine whether the hawkish bias extended beyond the three dissenters. Signs that other officials considered a rate increase before ultimately voting for a hold could keep the possibility of monetary tightening in September alive.

Fed hawks face a changing economic picture

Attention will focus particularly on the arguments made in favor of higher interest rates. At the July meeting, economic activity continued to expand at a solid pace, supported by strong productivity and investment, while inflation remained above the Fed's 2% target.

The more hawkish officials may have argued that supply shocks and the boom in Artificial Intelligence-related investment risk sustaining inflationary pressures. The relative stability of the labor market also provided an argument for the central bank to prioritize returning inflation to its target.

However, the macroeconomic backdrop has changed significantly since the meeting. July Consumer Price Index (CPI) and Producer Price Index (PPI) data showed moderating inflationary pressures. At the same time, the latest employment report signaled a more pronounced deterioration in the labor market, with an unexpected decline of 23K jobs in July and significant downward revisions to previous months.

These data have strengthened the case for patience. Wells Fargo economists expect the Minutes to show that most Committee members remain willing to wait for further progress on inflation, while arguing that the bar for future rate hikes remains relatively low if price pressures fail to ease further.

This shift also explains why investors might attach less importance than usual to Wednesday's document. The Minutes reflect a debate that took place before the latest employment and inflation data were released and could therefore portray a more hawkish stance than the Fed's current position.

Markets could consequently turn their attention quickly to the Jackson Hole Economic Symposium, where Kevin Warsh is expected to speak later this month. The Fed will also receive another round of inflation and employment data before its September meeting, leaving the interest rate outlook largely dependent on incoming economic data.

When will FOMC Minutes be released and how could they affect the US Dollar?

The FOMC will release the Minutes of its July 28-29 policy meeting on Wednesday at 18:00 GMT.

Expectations of higher interest rates have declined significantly since the July meeting. According to the CME FedWatch tool, markets now see a 34% chance of a 25 bps rate hike in September, down from around 60% three weeks ago, while keeping rates unchanged has become the clear base case.

Against this backdrop, the key question for the US Dollar (USD) will be whether the three dissenting votes reflect a broader hawkish current within the Committee.

If the Minutes show that several officials who voted to keep rates unchanged nevertheless believed that further monetary tightening could soon become necessary, expectations of a September hike could rebound. Such a scenario could support US Treasury yields and the US Dollar.

Conversely, if the document shows that most FOMC members view the current level of interest rates as sufficiently restrictive and prefer to wait for more data before considering another hike, expectations of a September hold could strengthen and weigh on the US Dollar.

The market reaction could nevertheless remain limited. The Minutes are backward-looking, and data released since the meeting have already altered the economic landscape. Investors may therefore focus more closely on upcoming US economic releases and Kevin Warsh's comments at Jackson Hole to reassess the monetary policy outlook ahead of the September meeting.

In the four-hour chart, the US Dollar Index (DXY) trades at 99.46, maintaining a bearish near-term tone as it holds below the 100-period simple moving average (SMA) at 100.03 and the 200-period SMA at 100.51. The downward resistance trendline, now coming in around 99.89, reinforces the topside cap, while the Relative Strength Index (RSI) near 38 hints at lingering downside pressure rather than a decisive oversold rebound.

On the topside, initial resistance is seen at the trendline area around 99.89, ahead of the 100-period SMA at 100.03. Further up, a horizontal barrier around 100.35 stands before the longer-term 200-period SMA near 100.51. On the downside, the next significant support is the horizontal floor at 98.90, where buyers could attempt to slow the current decline if selling extends.

(The technical analysis of this story was written with the help of an AI tool. Know more.)