FOMC: Ready For Anything

Once again, Federal Reserve members decided to keep rates steady and to maintain the current level of monthly asset purchases at $85 billion USD. Kansas City Fed President Esther George also stuck to her stance that current monetary policy may blow up in the face of the Fed, and that it might be time to start withdrawing some stimulus.

One thing that did change though, was a line that said that the FOMC is “prepared to increase or reduce the pace of purchases” as they see fit. In the recent past, there was some rumbling that the central bank would begin reducing asset purchases by the end of the year. With this slight change in language though, it appears that the Fed is really taking a cautionary stance and wants the flexibility to either add or reduce monthly bond purchasing should economic conditions warrant it.

In any case, this didn’t have much of an effect on the markets, as we didn’t see any violent reactions.

As we can see in the dollar index, the Greenback didn’t establish any new highs or lows during the New York session, and pretty much just followed its recent decline.

USDX

What should we focus on in the coming months?

It looks as though that we’ll have to shift our attention back to two familiar indicators in the near term – employment and inflation.

The Fed aims to bring the unemployment rate, which currently stands at 7.6%, down to 6.5%. If this month’s employment data falls short of expectations just as last month’s did, it could prompt the Fed to stick with its current stance, or perhaps even consider expanding its QE program. That being said, today’s nonfarm payrolls report could serve as a catalyst for a major move.

As for inflation, the Fed is targeting a range of 2.0% to 2.5%. However, it seems price pressures have been subdued as of late, which gives the Fed plenty of leeway to keep interest rates at very low levels.

But from the looks of it, the Fed will need to kick things up a notch if it wants to hit its targets. Even with open-ended stimulus program, job growth has been lukewarm at best. And equally as alarming is how inflation pressures seem to be dying down. These disturbing conditions have prompted St. Louis Fed President James Bullard to actually suggest that the central bank may have to ramp up its asset purchases just to achieve its goals.

What’s a central bank to do?

Keep in mind that the Fed doesn’t necessarily have to bump up its monthly purchases to give the effect of monetary easing. It can also opt to just extend its stimulus program and buy assets for a longer period of time. Doing so would effectively inject more money into the economy, albeit at a steadier pace.

In any case, the following months could be very crucial to the outlook for the U.S. economy. Policymakers will want to avoid another summer season slump, as the economy has lost momentum in the summer months for the last three years now. Will history repeat itself for a fourth time? I certainly hope not.