The FOMC said its word and it contains no change in policy, but the statement does contain a few nuances. “Economic activity has “paused””. No big move was expected after the dramatic announcement of QE4 in the previous meeting. The focus is on the tone of the statement.
EUR/USD traded on high ground around 1.3550 before the decision – it then moved up but retreated. and USD/JPY was above 91, off the highs, shaking but without any directional movement.
There was one dissent: Esther George which is a hawk. She replaces Lacker in her dissent.
Those who expected any hint of a change might be disappointed. Here is the opening snippet from the statement:
growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors
Did they incorporate the weak GDP report in the statement The QE policy will continue. The word “initially” was removed. However, when mentioning global financial financial markets, the word “significant” was removed. Bernanke seems to acknowledge the improvement in the European bond markets.
Another hint of the long term easing can be found here:
a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.
This text isn’t that different than from previous releases.
All in all, the decision is as expected: Don’t Build on Bernanke to Stop the Dollar’s Decline
In December, the Fed announced QE4: decided to expand its open ended bond buying scheme and to buy a total of $85 in treasuries and MBS, expanding the QE3 decision. The current program has no end date, contrary to QE1, QE2, Operation Twist 1 and Operation Twist 2.
Also the guideline for low rates is open ended, and now depends on employment rather than on a general date: the Fed is likely to keep rates low as long as unemployment remains above 6.5% and core inflation expectations remain under 2.5%. These are general guidelines and Bernanke stressed that the Fed will not move automatically.
In the meeting minutes of the decision, it was revealed that some FOMC members saw the QE programs beginning to unwind towards the end of 2013. Talking about an end to monetary tightening and setting a potential date was seen as a hawkish move. Nevertheless, the hawks in the FOMC are clearly outnumbered, and without an acceleration in the pace of job gains (currently around 150K per month), it is hard to see the Fed hint about any policy change.
Further reading: EUR/USD Breaks 1.35 – What are the next levels?Get the 5 most predictable currency pairs