Ben Bernanke and his colleagues at the Federal Reserve extended operation Twist in the official statement. The statement will be followed by a release of FOMC members’ projections and a press conference by Chairman Bernanke, in which he could offer hints about future policy.
More Twist means No QE3. The dollar rallies against risk currencies on no QE3. EUR/USD is now falling below 1.2670 after a very short lived battle. Cable is below 1.57. AUD/USD is now under 1.0150. USD/JPY is hardly moving, around 79.50. Update: Dollar rally followed by correction, but it is still stronger than before the announcement.
This is the announcement in the statement:
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities..
Yet again, there was one dissenter from the decision: Jeffrey M. Lacker who didn’t want more Twist.
For those wishing for future QE3, they could find comfort in this sentence:
The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability
The general consensus was for some kind of monetary stimulus from the Fed: either by extending “Operation Twist” that expires at the end of the month, or by introducing a third round of QE – the long awaited QE3. This was awaited since QE2 expired in June 2012.
However, there were many reasons to think that the Fed would NOT act at this time, especially as Bernanke said that returns on QE are diminishing. More details in the FOMC preview.
EUR/USD made another attempt to break the post-Greek-elections high of 1.2748, but failed to do so. It began retreating and fell under 1.27 just before the statement was released.
As expected, the rise of EUR/USD towards resistance was a great short opportunity.
USD/JPY rose in the hours before the event.
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