Fed Kept policy unchanged – tapering may start at end of 2013 – Euro USD is sliding

The FOMC didn’t  change its current asset purchase, but in the press conference that followed Bernanke stated that if economic conditions will continue to improve the Fed may start tapering QE3 by the end of 2013 and end it by mid-2014. The USD is currently trading sharply up against Euro and Japanese yen. The market is reacting to Bernanke’s statements about the Fed’s potential tapering QE3 as early as the end of 2013.

Some wording in the statement was changed compared to the previous FOMC statement:

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”

Nonetheless, the Fed remains dovish and states the U.S economy is showing some signs of improvement especially in the  labor market and housing market.  The Fed will keep its $85 billion a month asset purchase program.

In the press conference that followed Bernanke stated that if economic conditions will improve and rate of unemployment will fall below 7%, among other factors, the Fed may start to taper its asset purchase program by the end of 2013 and may end it by mid-2014.

The forex market promptly reacted to this news as the USD slightly rose. More specifically: EUR/USD traded at 1.3409 before the publication; now (18:08 GMT) the EUR/USD is at 1.3347 – a 0.37% drop from the beginning of the day. USD/JPY has moved higher. Currently, as of 18:08 GMT, the USD/JPY is trading at 96.135.

The Fed also released fresh economic forecasts: The Fed still projects mid-term inflation to remain at or below 2% and no higher than 2.5%; the labor market is showing signs of improvement but the rate of unemployment, which is currently at 7.6%, is still high.

Bernanke  continues to point a finger at the government for its lack of involvement in the jumpstarting the U.S economy. The IMF also criticized the budget cut implemented by U.S policymakers earlier this year.

This is one of the highly anticipated decisions by Ben Bernanke and his colleagues. The question of tapering bond purchases (QE) and its timing was a major market mover in recent weeks and months. A self-sustained recovery allows to the Fed to begin scaling back the pace of bond buys – this is not really tightening, just a slower expansion of the Fed’s balance sheet.

However, as mentioned in the FOMC preview, economic signs were mixed and left a lot of options for the Fed.

Ben Bernanke takes the stage to explain the decision at 18:30 GMT. This decision will have a long lasting impact on currencies. For the impact on gold and oil, see Trading NRG.