FOMC: The Aftermath

fomc.pngWhile the entire world was glued to their TV screens watching new season episodes of their favorite series, traders had all eyes and ears on the Fed’s monetary policy statement. Even though the FOMC dropped several hints about further easing in the past, many predicted that the Fed wouldn’t make any drastic changes to their monetary policy just yet. Well, it looks like they were right. Unlike in their August meeting, the tone of the FOMC statement was a bit less downcast this time.

Still, policymakers emphasized that they are prepared to roll out those stimulus measures if necessary. They also pointed out that inflation could remain subdued in the near term, which is why they’re willing to switch to a more accommodative policy stance to bring inflation back in its target range.

It looks like the Fed believes that the US economy is bound to get worse if it does not step in. The Fed has always been ahead the curve with these things, acting ahead of a potential economic slowdown. And who could blame them? Inflation has stayed below the Fed’s target, unemployment has remained at elevated levels, and most GDP predictions for this year have remained below 1%!

With such dovish words, it wasn’t all too surprising that investors decided to dump the dollar. It succumbed to every major currency, most notably to the euro and the yen. EURUSD hit a new monthly high at 1.3300, while USDJPY sharply fell back below 85.00, raising the possibility of another BOJ intervention.

I suppose investors were turned off by the idea of a second round of quantitative easing. I mean, who wouldn’t be? While other central banks are reining in their recovering economies or, at worst, holding their ground, the Fed is out there still trying to kick-start the economy.

We haven’t even touched on the possible negative effects of further quantitative easing! The “extraordinarily accommodative” policy in place brings the risk of hyperinflation if too much money goes into circulation. Though the US is combating deflationary threats at the moment, hyperinflation is just as unwelcome as it can cause prices of goods to skyrocket over a short period of time. And, as I mentioned before, the US runs the risk of fattening their already-bloated balance sheet even more.

Given all these new developments, I’m guessing that the Fed may finally announce that it will inject additional policy stimulus in its November meeting. But hey, I’m no psychic… You never know really know how things will work out. One day the Fed’s in wait-and-see mode and then suddenly, when you least expect it, the Fed drops says it’s prepared to engage in another round of quantitative easing.

Besides, some are questioning the effectiveness of such a move. Take a look at Japan, who took the quantitative easing route sometime between 2001 and 2006. Its GDP only experienced a moderate growth, which unfortunately came to a halt once easing ended. The Fed has already done QE once and look where the US is now!

In any case, the next meeting is still six whole weeks away… So we’ve got a lot of time on our hands to analyze what the Fed’s next move will be. Stay sharp, folks!