Hawkish FOMC Statement Leads to Market Sell-Off 

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The FOMC monetary policy announcement and subsequent press conference from Chairman Bernanke took place earlier this afternoon, and has led to a sharp turnaround in risk appetite, as investors shed exposure to high-yielding asset classes. 

The statement from the FOMC was a little more positive on the US economy back in May, with the committee seeing downside risks to the economy abating somewhat, but decided to keep the level of overnight interest rates steady, as well as the current pace of asset purchases at $85bln per month. 

In a surprising turn, there were two dissenters voting against the monetary policy action, most notably the fact that St. Louis Fed President Bullard wanted to see the Fed take more of a strong commitment to defending its inflation mandate.The Federal Reserve also released their summary of economic projections at the same time, which showed the Committee now saw unemployment returning to a level that could warrant a discussion of raising short-term rates by as early as 2014.  Back at the May meeting the FOMC projected unemployment would range between 6.7% and 7.0% in 2014, but have now revised this to a range of 6.5% to 6.8%. 

While Bernanke has reiterated this is not a trigger level that automatically will see the Fed move short-term rates higher, this does increase speculation that tapering of the asset purchase program could happen later this year.In fact, during Bernanke’s press conference, the head of the Fed said they may moderate their asset purchases later in 2013, with a goal to end the program by mid-2014 should unemployment come down to 7.0%.  The more hawkish tone towards the prospect of tapering the Fed’s asset purchase program has traders reducing exposure to equities along with high-beta currencies.  The S&P has dropped approximately 10pts since the FOMC statement, with the Loonie erasing a big figure against the USD as USDCAD trades into the high-1.02s.  Price action can be characterized by broad-based USD strength, as the DXY has gained 0.91% to trade up to 81.34, while EUR has fallen into the high-1.32s against the big dollar.Happy Trading!

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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