Ben Bernanke Plays Down QE3 – Dollar Stronger

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The Big Ben met the press once again. He played down the chances of QE3, comparing the same period last year and saying that the situation improved. Euro dollar is weaker. USD/JPY is stronger. There were a few more interesting quotes. All the updates are here.

Highlights:

  • QE2 Lite kicked off – reinvestment of maturing assets is underway as QE2 ends.
  • Situation is better now than one year ago: no deflation and a higher rate of job gains. The explicit talk about QE3 and the comparison to the period of QE2 (this time last year) is an important hint that took the dollar higher. This means no QE3 in the foreseeable future -dollar bullish.
  • Stopping to reinvest maturing assets (end of QE2 Lite) – a separate decision. This is the first step in the exit strategy.
  • While US banks aren’t badly exposed to Greece, directly or indirectly, a default of a small country could significantly hurt the US.
  • Extended period of low interest rates means at least two or three FOMC meetings. We know that this is much more…
  • House prices are low mostly because of foreclosed homes. When this is resolved, prices will rise and confidence will go along.
  • Bernanke was very confident up to the question about inflation getting out of control… He returned to having a firm voice afterwards.

EUR/USD eased from 1.4425 to 1.4380 on this talk. USD/JPY is higher, now at 80.30. The moves are very limited and gradual, but progressing nicely.

QE2, announced in November, is about to end in one week. The Federal Reserve said it would reinvest maturing assets. This begins now. Some think that QE3 will be announced soon, as the US economy is not doing well, to say the least. See the FOMC Preview for more on the expectations from this event. The big question is hints about QE3.

Live Blog

* All times are GMT.

18:14 EUR/USD is just above 1.44. It didn’t move too much after the release of the FOMC Statement, that didn’t provide any news.

18:15 Press conference starts. Growth forecast lowered.

18:16 QE2 Lite Kicked Off – Fed will reinvest maturing assets.

18:17 Inflation still expected to remain at 2%.

18:19 Recovery slower than expected, especially employment. This is temporary due to higher consumer prices.

18:20 Japanese disasters hurt supply chains, and high fuel prices also hurt consumption. This has eased now. Somewhat optimistic.

18:20 Unemployment rate to drop gradually, to 7% in 2013.

18:21 Inflation is now higher, but expected to drop.

18:22 Low levels of interest rates are expected to remain for an extended period of time. No change.

18:23 Stopping to reinvest maturing assets is a separate decision that will be the first step of tightening. He will not say when.

18:25 He cannot explain why the recovery is so slow. Perhaps weakness in the financial sector, housing and deleveraging are to blame.

18:26 The forecasts for 2013 haven’t changed… That’s so far…

18:27 Greece is in a difficult situation. We are not involved. A failure to resolve the Greek crisis will hurt the global financial system – it is a risk.

18:28 Regarding QE3 – then, inflation was low and falling. QE2 has eliminated deflationary risks.

18:29 Situation is much better than one year ago: both deflation and weak job growth are gone. The case then was much stronger than now. Dollar stronger.

18:31 Sharp immediate cuts in the deficit won’t create jobs in the short run. Fiscal tightening is bad for job creation.

18:34 Inflation targets are worth considering, but not on the agenda now.

18:35 More transparency is needed, like this press conference.

18:36 We are examining the exposure to peripheral European countries. Banks are not significantly exposed directly, although they are indirectly exposed. CDS not accounted for. We have asked banks, and the effect is very small.

18:39 But, a disorderly default in a small country will be significant for the US as well.

18:43 Has the rise in core inflation created worries? Some of the effects are temporary: supply chain in Japan (auto prices) – auto prices are expected to come back down.

18:46 Bernanke somewhat confused from the question but still says that core inflation is under control.

18:47 A long period of time means at least two or three FOMC meetings. We’re not close to an exit process at this point.

18:49 What type of exit strategy will be made? Bernanke refuses to answer. We all have estimates in our minds, and forecasts can change.

18:51 Bernanke submits his own forecasts. Considers himself somewhere in the middle. Sees the slowdown temporary.

18:53 We need to address the long term deficit. He doesn’t say what the government should do.

18:54 Growth in H2 is expected to be better. As a result, more jobs will be created according to forecasts. But concerning the unemployment rate, it will take longer….

18:56 Repeats the deflation isn’t a risk – different from last year. A second comparison. EUR/USD down to 1.4370.

18:58 If needed, we could buy more bonds, change communication, and do other stuff if conditions are necessary.

19:00 No statistical trigger for changing policy. 17 different members have 17 different views. Not going to give an indicator for changes.

19:03 We are trying to help people buy houses by lowering interesting. But despite this and lower prices, the requirements have been tightened and unemployment remains high. The Fed is trying to address this.

19:06 While house prices are falling, this is mostly in “distressed” houses – foreclosed. If this will stabilize, prices will rise and confidence in buying homes will rise. Interesting point.

19:07 Press conference ended. Wrap up coming soon.

Further reading:

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.