Fed Leaves Policy Unchanged – Modest Changes in Statement

Ben Bernanke and co. left the policy unchanged. Basically, the Fed is waiting for the economy to substantially improve before changing the policy. By a wide consensus, no change in policy was expected by the FOMC. The better than expected economic indicators in the US were expected to improve the tone of the statement, but not trigger any change in policy.

EUR/USD traded at around 1.2950 before the release, rose a bit afterwards but didn’t go to far. USD/JPY is advancing on the news, in a limited manner..

Update: Follow  the live blog here.

After stating the economy paused, this is a change in the statement:

a return to moderate economic growth following a pause late last year

The Fed mentioned stronger household spending and fixed investment. However, the fiscal policy is a headwind. As usual, there was one dissenter: Esther George.

Economic Projections

The Fed also released updated economic projections: GDP is now seen at 2.3-2.8%, down from 2.3%-3%. 2014 growth forecasts are also marginally lower: 2.9%-3.4% from 3-3.5% earlier – no dramatic changes.

The focus now shifts to the press conference held by Fed Chairman Ben Bernanke, starting at 18:30 GMT. Stay tuned for a live blog of the event.

Background

In the previous decision in late January, the Fed made no change in policy and noted that the economy “paused”  in Q4 – in-line with the flat GDP that was recorded.

The last big change was seen in December, when the Fed announced QE4: it expanded the size of the open ended quantitative easing program to $85 billion per month, and tying a raise in the interest rates with a drop of the unemployment rate to 6.5% and as long as inflation expectations remain under 2.5% for the one to two year horizon.

Some members see some kind of unwinding of QE towards the end of 2013. This “revelation” in the meeting minutes have strengthened the dollar, even though these hawks are in a clear minority controlled FOMC. Ben Bernanke and most members prefer a continuation of the loose monetary policy.

Further reading:  Risk-on/Risk-off dynamic of FX markets is all but dead