Fed Leaves Policy Unchanged – Dollar Marching Higher

The Federal Reserve decided not to introduce any policy changes this time. Those that expected QE3, QE3 Lite or anything of that sort are retreating.  

The initial reaction is a stronger dollar. EUR/USD dropped under 1.31. USD/JPY is a bit higher. It is challenging the 82.87 line.

Trading is still choppy – the dollar retreated after the initial move and is now falling again.

Highlights from the statement:

• QE3 is NOT mentioned whatsoever.
• Forecasts are a bit stronger. This is mentioned in the statement: “the unemployment rate has declined”.
• Regarding inflation, the FOMC says it remains subdued, but it does acknowledge the rises in crude oil and gasoline prices.
• Only  Jeffrey Lacker voted against the decision. He doesn’t to keep the pledge to keep rates low until late 2014.

All in all, the decision was widely expected, so the reaction in the markets isn’t so strong. It’s important to remember that the full reaction to US rate decisions usually take time. The full reaction might be seen as late as the European session tomorrow.

Why this was expected

As this meeting drew closer, more and more positive signs piled up and reduced the chance of more QE. The recent jobs report, which showed a big gain in jobs and also in the employment-to-population ratio was icing on the cake.

As noted in the FOMC preview, the Federal Reserve had quite a few other policy options, including extending Operation Twist or announcing a sterilized QE3 – meaning that the central bank would drain funds out of the markets. This is what the ECB does.

In the previous meeting on January 25th, the Fed extended its pledge to keep interest rates low from mid 2013 to late 2014.

EUR/USD traded around 1.31 before the release. It fell under the 1.3080 line earlier in the day, but managed to escape. USD/JPY was capped under the 82.87 line, trading around 82.70 before the publication.