So the Fed is Super Dovish. Now What?

Like the plot twist in Fight Club, few people could have predicted the ending of the Septaper saga.

In a 9-1 decision, the FOMC members voted to keep its monthly asset purchases steady at $85 billion. Recall that improvements in the U.S. jobs market and other major economic data prompted traders to expect at least a $5 to $15 billion reduction to the Fed’s bond purchases. With a disappointment like that, it’s no wonder the Greenback got sold off like there’s no tomorrow!

What motivated the Fed to refrain from tapering?

Ever since Bernanke hinted at a Septaper last June, the long-term mortgage rates started going up. For example, 30-year fixed mortgage rates have jumped from 3.5% in April to around 4.5% recently. That’s not good if the Fed wants to stimulate the economy!

The Fed also believes that the lack of government spending is already hindering economic growth. What’s worse, this problem will be further highlighted in a couple of weeks when the U.S. policymakers decide on whether or not they should raise the U.S. debt ceiling. If this story does not end well, Uncle Sam could be in for more budget cuts and less jobs, consumer activity, and investor confidence. Yikes!

What DID they change?

While the Fed didn’t have any adjustments to its current stimulus program, they did make some changes when it comes to their economic forecasts. In particular, they announced another set of downward revisions for its GDP estimates for this year and the next while upgrading its inflation outlook.

Aside from that, Bernanke dashed hopes of an interest rate hike once the economy achieves the 7% jobless rate target. “There is not any magic number that we are shooting for,” he clarified. He said that policymakers are waiting for an “overall improvement in the labor market” instead.

What now?

Big Ben didn’t dismiss the idea of tapering entirely, as he said that it might still be a possibility this year. Of course, their decision mostly hinges on U.S. economic data in the coming months.

With that, the U.S. dollar might continue to react to fundamentals in the near term, as market watchers continue to adjust their expectations for a Fed taper.

Now that the Septaper fog has lifted, a return to fundamentals might also spark profit-taking among higher-yielding currencies which are being weighed down by weak fundamentals. For instance, EUR/USD might have trouble sustaining its rallies as the ECB has recently expressed its bias towards further easing.

Until the next big theme comes though, we could expect to see a continuation of the markets’ initial reaction to the downbeat FOMC statement. Do you think this will be the case? Let us know by voting through the poll below!