June 20, 2012
Today’s FOMC Meeting has the potential of once again changing the market
sentiment for the USD for the medium term, especially considering the
deterioration of U.S. economic recovery as indicted by the string recent less
than forecasted economic data.
With the new format of announcements in place, where FOMC will release a
statement at 12:30pm followed a Press Conference at 2:15pm, giving onsite media
members opportunities for live Q&A, where Bernanke could provide further
elaboration to the burning question: To QE3 Or Not To QE3?
With that being said, keep in mind that Operation Twist is expected to
finalize in this month, so assuming that there won’t be any pauses between
easing, FOMC may delay the announcement for some forms of QE next month, thus
making today’s meeting a bit less likely surprising, although there is certainly
a possibility for Bernnake to “hint” the market for any future Fed action (i.e.
QE3…)
Considering also the fact that the last 3 months average NFP figure is less
than 88K, some Fed officials are already “preparing” for the possibility for
easing, I’d say QE3 is definitely on the table. Here are some notable comments
from Fed officials after last meeting:
-
(US) Fed’s Evans (non-voting member): Reiterates support
to extend ‘operation twist’- More aggressive monetary policy would cut the
Unemployment Rate.
-
(US) Fed’s Lockhart (voting member, dovish):Reiterates
that the Fed may need to provide more aid – Have an open mind as far as the next
FOMC rating.
-
(US) Fed’s Williams (voting member, dovish): Concerns
about Europe are threathening the global financial system; stress tests suggest
US banks are resilient. US growth remains moderate.
-
(US) Fed’s Evans (alternate, dove): Fed is prepared to
act; Chairman Bernanke has stated that clearly today.
Employment trends are not strong enough; Need to gain 200-300K net new jobs per
month. Fed can improve upon forward guidance; Reiterates call for
numeric (rather than calendar) targets such as 7% unemployment
rate.
So here’s the forecast for the actual rate decision:
12:30pm US
FOMC Interest Rate Forecast 0.25% Previous 0.25% (Both Unchanged)
2:15pm US
FOMC Press Conference
There is a Live Webcast available for the Press Conference, you can watch
it here:
http://www.ustream.tv/federalreserve
Recommended Pairs : EURUSD, USDJPY
Update 6-19-2012 11:50am EST(US) Goldman Economist
Hatzius: reiterates Goldman expects there will be some form of monetary easing
announced at tomorrow’s Fed meeting. Fed will most likely ease monetary policy,
reduce its GDP forecast at the meeting. Fed may further expand its balance sheet
and/or expand operation twist.
Information received since the Federal Open Market Committee met in March
suggests that the economy has been expanding moderately. Labor market conditions
have improved in recent months; the unemployment rate has declined but remains
elevated. Household spending and business fixed investment have continued to
advance. Despite some signs of improvement, the housing sector remains
depressed. Inflation has picked up somewhat, mainly reflecting higher prices of
crude oil and gasoline. However, longer-term inflation expectations have
remained stable.
I’ll be looking for along the same lines of language acknowledging positive
growth, and look for any changes on inflation expectations.
Consistent with its statutory mandate, the Committee seeks to foster
maximum employment and price stability. The Committee expects economic
growth to remain moderate over coming quarters and
then to pick up gradually. Consequently, the Committee
anticipates that the unemployment rate will decline gradually toward levels that
it judges to be consistent with its dual mandate. Strains in global financial
markets continue to pose significant
downside risks to the economic outlook. The increase in oil and
gasoline prices earlier this year is expected to affect inflation only
temporarily, and the Committee anticipates that subsequently inflation will run
at or below the rate that it judges most consistent with its dual mandate.
I’d focus on the phrase “and then to pick up gradually” and “significant
downside risks to the economic outlook” as the former one was added last
statement as a message of Fed’s confidence in recovery, although things have
changed recently, so any changes to this could mean that Fed’s outlook is
changing… The latter phrase, the use of the word “significant” is the focus and
we’ll continue to monitor it. If “significant” is changed to “moderate” then it
is a good sign for risk appetite; on the other hand, if it is changed to
“extreme”, then it is good for risk aversion…
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 expects to maintain a highly accommodative stance for monetary policy.
In particular, the Committee decided today to keep the target range for the
federal funds rate at 0 to 1/4 percent and currently anticipates that economic
conditions–including low rates of resource utilization and a subdued outlook for
inflation over the medium run–are likely to warrant exceptionally low levels for
the federal funds rate at least through late 2014.
I expect no real changes to the paragraph above, and if the Fed changes the
period from late 2014, expect market to react as any date ahead of 2014 will
signal strong USD, and vice versa on a date after 2014…
The Committee also decided to continue its program to extend the average
maturity of its holdings of securities as announced in September. The Committee
is maintaining its existing policies of reinvesting principal payments from its
holdings of agency debt and agency mortgage-backed securities in agency
mortgage-backed securities and of rolling over maturing Treasury securities at
auction. The Committee will regularly review the size and composition of its
securities holdings and is prepared to adjust those holdings as appropriate to
promote a stronger economic recovery in a context of price
stability.
I believe the above paragraphs are going to be the focus of this statements
are investors are looking at possible changes to Fed stimulatory measures… Here
are some potential scenarios:
- Extension of Operation Twist beyond June 2012 – USD could become
weaker and Equity Market will probably rally.
- Announcements of New Quantitative Easing – USD will be weaker and
market will rally on selling USD.
- No change on current program, letting it expire in June – USD will
probably be neutral and possibly gain in the hours to come, as no change means
it will take at least 2-1/2 months before any QE is in place (as the Fed usually
prepares the market ahead of time before announcing a QE measure… so assuming
the Fed is going to prepare the market during the next meeting on August 1,
2012, the actual announcement will then be on September 13, 2012…)
