FOMC Sits on Its Hands… Again!

As expected, Big Ben and his men decided against making any monetary policy changes during the FOMC statement this week. At first I thought that policymakers just got caught up with Ben Bernanke‘s 58th birthday bash, but it turns out that the FOMC was widely expected to sit on its hands for the second meeting in a row.

Apparently, the U.S. central bank simply stuck to its pledge to keep asset purchases unchanged and to maintain interest rates at their current lows until mid-2013. Yes, that’s right, 2013! They sure take their “extended period” phrase very seriously!

Aside from that, the Fed also mentioned that it would carry on with Operation Twist. For those of you who already forgot what that policy measure is all about, it’s simply the exchange of $400 billion worth of short-term debt with long-term securities to extend the average maturity of its holdings.

Even though the Fed’s decision wasn’t much of a surprise, some were disappointed to find out that the central bank didn’t give out any interest rate forecasts just yet. You see, there have been talks that Fed members have been working with a communications committee to look into the possibility of rate forecasting. However, that idea remained just an idea… for now.

Overall, Fed Reserve Chairman Ben Bernanke sounded pretty upbeat. It wasn’t just because it was his birthday though! The string of positive reports we’ve seen from the U.S. also gave the head honcho something to be happy about.

Since the last FOMC statement in November, we’ve seen manufacturing activity expand at its fastest rate in five months when the ISM Manufacturing index for November printed at 52.7 after coming in at 50.8 in October. On top of that, Conference Board also reported that consumer confidence skyrocketed in November with its index tapping its highest reading since July at 56.0 from October’s 38.9 reading.

And so, it wasn’t much of a surprise to hear the birthday boy say that the “economy has been expanding moderately” amid signs of slowing growth in the global economy, which to me is an obvious reference to Europe’s debt crisis.

The Fed acknowledged that labor market conditions have improved. However, officials still think that that the unemployment rate “remains elevated” despite dropping from 9.0% in October to its lowest level since March 2009 at 8.6% in November.

As for inflation, central bank officials think that it has moderated since the beginning of 2011 and that in the coming months, it will remain stable.

So what’s next for the Fed?

A lot of market junkies interpret the Fed’s optimism as a sign that it isn’t ready to launch QE3. Well, not at least until we see economic conditions weaken.

Consequently, the dollar rallied across the board. As Pip Diddy said in his forex fundamentals report, EUR/USD fell to its 11-month low at 1.3029. The U.S. Dollar Index (USDX), which measures the value of the dollar against a basket of currencies, even ended yesterday’s trading above the major resistance at 80.000!

USDX Daily Chart

In the coming months though, analysts think that we would definitely see a revamp in the Fed’s communication strategy. The central bank’s resident hawk Philadelphia Fed President Charles Plosser and resident dove Chicago Fed President Charles Evans don’t usually see eye-to-eye, but they both seem to like idea of the Fed providing forward guidance in its monetary policy.

As for more stimulus, big Ben and his buddies will be on their toes for developments in the euro zone and changes in the U.S. outlook before they pull the trigger on QE3. So we should all be too!

In the meantime, the dollar will probably continue trading higher on the charts thanks to the relatively-optimistic FOMC statement. Unless we see any positive developments in Europe’s debt crisis, I think the optimism of the FOMC statement would give investors one more reason to flock into the dollar for its safe haven reputation.

Then again, that is only this humble, not-so-old man’s opinion. What do you think?

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