QE2 was announced – the statement did mention numbers – a total of $600 billion that will be spent until the end of the second quarter, at a pace of $75 billion per month. The initial reaction is a fall of the dollar, but this was reversed quickly. The markets are still digesting the decision
EUR/USD strengthened before the release and crossed the 1.4030 resistance line – it jumped to almost 1.42 afterwards and then dropped back. USD/JPY traded at 81.20 before the decision and fell below 81 afterwards, GBP/USD at 1.6090, just above the important 1.6080 line it crossed earlier. AUD/USD traded at 0.9972 and reached 1.0023 (the previous peak) after the announcement, and USD/CAD at 1.0112 and went to 1.0060 after the announcement and before bouncing.
Update September 13th 2012: Update: Fed Announces QE3: $40 Billion in MBS, Open Ended, Low Rates Through 2015
Here is the key part of the statement:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
Note that the there’s a pledge to “ensure that inflation is consistent with the mandate, meaning that the Fed wants stronger inflation. Only one member, Thomas Hoeing, voted against it. No one else, such as Kevin Warsh, joined the opposition.
This is not far from the expectations of a $500 billion program at a monthly pace of $75 billion. This is a mix of scenarios 1 and 2 for the quantitative easing decision.
No change was made in the commitment to leave the interest rates low for “an extended period of time”. This continues to weigh on the dollar.
The decision to print $600 billion is negative for the greenback, but the event was communicated quite well, and it’s already priced in. The gradual pace means that that the spillage of dollars will be gradual and that it can be stopped well before reaching the $600 billion number.
I believe that the decision will strengthen the dollar in the short term, but the issue of quantitative easing, its pace and actual implementation, will stay on the agenda for a long time.
Tension towards this decision has built up in the past two months or so, has created tensions between the US and its trade partners and has taken the dollar down. In the past weeks, the markets stabilized. EUR/USD enjoyed the expectations towards the release and has also seen the strongest stabilization – it got stuck in a range.
It’s important to remember that many decisions by the Federal Reserve had an initial reaction that was totally reversed afterwards. The decision is released during the New York session, which is important, yet it takes analysts and traders to fully digest the FOMC statements. Bernanke’s wording are usually complex, and it takes time to understand the hints hidden inside. The market doesn’t always really understand what’s there, but reaches some kind of consensus, and this takes time.
So sometimes the full reaction comes when the Tokyo session begins, and even only when the European session begins.