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Fed leaves policy unchanged, omits “tighter financial conditions” –

The Federal Reserve left its policy unchanged. It was not expected to make any policy changes in this meeting and maintain the current pace of bond buys at $85 billion per month. No press conference is scheduled. The statement contains the same phrases about “awaiting more evidence” of economic improvement. The Fed removed the line about tightening financial conditions and this could be key to the USD strength.

Currencies traded quietly during the day, with EUR/USD at 1.3765, USD/JPY at 98.20 and GBP/USD around 1.6060, little changed during the day.  However, the dollar lost some ground just before the publication. We saw a similar reaction in September. After the publication, the initial reaction is a stronger dollar– updates coming —

Here is an important part of the statement:

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

The Fed left the mention of “downside risks diminishing”:

downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall

Tighter financial conditions: the Fed created tighter financial conditions (higher long term interest rates) by hinting about tapering in May and in June. In September, this was one of the reasons for not tapering.

Omitting this line can be seen as a better environment to taper bond buys: allow for long term rates to rise slowly.

Rises in house prices should have triggered QE tapering earlier. Perhaps it is not that far away after all.

Currency reaction: a stronger dollar, followed with a bounce:

After the initial bounce, the dollar resumes its assault, with EUR/USD falling to new lows.

The central bank surprised markets in September by deciding not to taper and said it Since then, we had the government shutdown that made economic data unavailable and also hurt the economy, making the decision not to taper quite understandable.

The meeting minutes from September showed that the decision not to taper was a close call, and that the Fed still sees QE tapering happening later in 2013 and an end to QE by mid 2014.

There is one more meeting left in 2013: scheduled for December 18th and includes a press conference.

Further reading:  Has the Euro slide against the US Dollar started?

Yohay Elam

Yohay Elam

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 a 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.