Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months [previous "economic activity decelerated somewhat over the first half of this year"]. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed [previous "Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year"]. The housing sector has shown some further signs of improvement, albeit from a depressed level [previous "Despite some further signs of improvement, the housing sector remains depressed."]. Inflation has been subdued, although the prices of some key commodities have increased recently [previous "Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline"]. Longer-term inflation expectations have remained stable.
Verdict: Slightly Positive ? Fed mentioned economy expanded, housing sector improvements, and inflation under control.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions [previous "Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate"]. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
Verdict: Slightly Negative ? Fed is worried that without further help, economy won?t recover.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month [new measures introduced]. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative [summarizes current measures and objectives].
Verdict: Negative ? Fed announces $40B per month in MBS purchases (QE3?) and maintains Operation Twist, signaling that US economy needs assistance to recover.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases [new section describing the new program and what the Feds will do in the future].
Verdict: Negative ? Open ended program gives the Fed maximum flexibility but also keeps the market on watch for more easing by the Feds.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015 [previous "late 2014"].
Verdict: Negative ? Forward guidance extended by 6 months into 2015. Fed will keep QE running after economy recovery is in place, signaling even more bearish tone for the USD.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
Economic Forecast:
With the Unemployment Rate dropping from the 8.1% level to 7.8% and the fact that all aspects of the economy seem to show signs of?recovery, it would be interesting to see if the?FOMC changes its tone on the economy.??If we get a particularly positive statement over the state of the economy, then fears of the Feds pulling?plug on QE3 may end up driving the market, although it is very unrealistic to even contemplate that, especially?with the Feds openly?committing to keep the?easing policy intact?even after the economic recovery starts to gain momentum? but then again, it never ceases to surprise me how?illogical the market can be sometimes.? Of course, this would be a pro dollar risk adverse move.
On the other hand, if the Feds still keep the same tone?on the painfully slow?recovery, especially?in the employment sector, then it is considered as a potential risk appetite move as there should be no reason to end QE3 early.? We should see USD weaken in this scenario, but JPY will probably be even weaker as the market demand riskier currencies for better return on investment.? This would be?a weak dollar strong euro scenario.
All in all because of the recent action by the Feds, i.e. QE3, I don?t really think we are going to get a surprise today? but then again this will be a good opportunity for the Feds to reassure the market, so I wouldn?t miss this announcement if I were you.
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Thanks,
Source: http://www.henryliuforex.com/7612/us-fomc-interest-rate-october-24-2012-currency-news-trading/
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