The last FOMC statement for 2012 started out pretty boring. Just as expected, policymakers kept interest rates unchanged at 0.00%-0.25%, describing the range as appropriate.
It was also announced that the central bank will continue its asset purchases when Operation Twist expires in a couple of weeks. On a monthly basis starting on January 2013, 45 billion USD worth of Treasuries will be bought on top of the 40 billion USD monthly purchase of mortgage-backed securities.
The decision wasn’t unanimous though. President of the Federal Reserve Bank of Richmond Jeffrey Lacker opposed further easing. Still, that wasn’t anything new. Heck, Lacker has been the only dissenter at every FOMC meeting for this year.
Naysayers were right in bracing for downward revisions to economic growth too. U.S. GDP for 2013 is now seen to come in somewhere between 2.3%-3.0% after initially being predicted at 2.5%-3.0% in September.
And then, just when everyone thought the FOMC couldn’t get any more boring, they dropped the bomb!
The FOMC statement revealed that policymakers will replace their calendar approach in targeting rates with specific numerical baselines. What this means is that Big Ben and his crew won’t increase interest rates until the unemployment and inflation rates hit their targets. According to the statement, rates would remain on the down low for as long at the unemployment rate is above 6.5% and the inflation rate is below 2.5%.
How will the new targets affect the Fed’s future monetary policy decisions? If Big Ben is to be believed, the new targets don’t really mean much as it doesn’t alter the Fed’s projections for unemployment and inflation.
But market players are reading a lot more from the change. For one thing, the Fed’s numerical targets support the its goal of becoming more transparent with the markets as they make it easy for Average Joes to measure economic recovery.
The Fed’s new guidelines will also help traders align their stimulus expectations with the Fed. Since the central bank will specifically peg their rate decisions to economic figures, we could see USD trade higher on strong NFP and inflation figures as they could reduce the need for more easing. Negative reports will probably then have an opposite effect on the currency.
Last but not the least, analysts say that the Fed’s decision to set targets indicate that the central bank is running out of options. As it stands now, the strategy of setting numerical targets is in play along with Operation Twist, historically-low interest rates, QE, and other central bank strategies.
Dollar bears loved the prospect of more stimulus as the Greenback fell following the announcement. However, we see that the USDX stopped short of trading below a rising trend line on the daily time frame.
Could this mean that the bearish effect of a dovish-sounding FOMC statement won’t last long? After all, everyone already expected the Fed to be eager to adopt a loose monetary policy. Then again, are investors just gearing up for another round of dollar selling?