Considering how the U.S. economy has more problems than a mathematics book, it was no surprise that the Federal Reserve decided against tapering stimulus in their monetary policy statement this week. But why the heck did the Greenback rally after the Fed announcement?! Here are three possible explanations:
1. No mention of the government shutdown or the debt ceiling
Perhaps the biggest issue that affected the U.S. economy this month was the government shutdown, which resulted to the temporary closure of non-essential services and furloughed employees. This shutdown lasted for more than a couple of weeks so it’s likely that overall economic activity took a hit.
However, the U.S. central bank seemed totally indifferent about the government shutdown, as Bernanke didn’t say whether it put a significant drag on economic growth or not. He didn’t even talk about the need to adjust their monetary policy stance because of this!
2. Less dovish economic outlook
What’s even more surprising is that, even with the slack in the jobs sector, Bernanke said that labor market conditions have improved. Really?!
A quick recap of the latest non-farm payrolls figures shows three consecutive months of subpar increases in hiring. Next week’s October NFP release is also projected to post weaker jobs growth of 120K, which would mark a steady decline in hiring since June this year.
Despite this, the Fed still believes that the economy is expanding at a moderate pace, similar to what they have been saying in their past rate statements. For now though, policymakers will continue to wait for more conclusive evidence that growth will carry on.
3. Fed didn’t postpone the taper
At the end of the day, Bernanke didn’t drop any hints on whether the taper will be pushed back a few more months or not. A few weeks ago, market watchers began speculating that March 2014 would be the earliest possible time when the Fed would start winding down its bond purchases. Further disappointments in U.S. data in the past few days led some to believe that the Fed wouldn’t start tapering until the second half of next year.
All Big Ben said was that the Fed would keep close tabs on incoming data, which means that U.S. economic releases could continue to spark a fundamental reaction from the Greenback in the coming weeks.
In a nutshell, the Greenback’s post-FOMC rally wasn’t really a result of what the Fed said but more of what they DIDN’T say. Those who were expecting to hear downbeat remarks or hints of a delayed taper were relieved to find out that the Fed wasn’t so pessimistic after all. In fact, some even started thinking that the Fed could start tapering this December! Do you think this is possible?