Was that an early Christmas present to dollar bulls or what?! Here are the five main takeaways from the December FOMC statement and what these could mean for the Greenback next year.
1. Taper of $10 billion is “modest”.
While the Fed’s decision to taper already caught several traders by surprise, it seems that the $10 billion reduction in bond purchases is only the tip of the iceberg! According to Big Ben, the December taper was a “modest move” and that the central bank might keep tapering in “measured steps” for their next rate statements. Of course he was also quick to point out that future monetary policy decisions will depend on whether the U.S. economy is able to sustain its recovery or not.
2. Inflation is still a concern.
Another factor that could affect the Fed’s next taper-or-no-taper decisions is the inflation outlook. Bear in mind that annual CPI has been hovering below the central bank’s 2% target for quite some time now and, although inflation is projected to pick up in the near term, policymakers could remain cautious about withdrawing stimulus too soon and causing weaker price pressures.
3. Fed is upbeat about employment.
On a lighter note, the Fed is giddy about employment prospects in the U.S. economy, as Bernanke said that they are reducing bond purchases because of “the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” Although Bernanke stressed that interest rates will remain low until the jobless rate falls to 6.5%, policymakers are projecting that unemployment will drop to 6.3% to 6.6% next year!
4. U.S. markets are happy, other economies are worried.
With that, U.S. equity markets greeted the taper announcement by jumping to record highs. The Dow Jones Industrial Average soared by nearly 300 points and ended up setting a new high along with the S&P.
On the other hand, a hint of caution was seen among Asian economies and emerging nations, as Hong Kong’s Hang Seng index posted a 0.3% loss while commodity prices posted declines. After all, a lower amount of stimulus in the U.S. economy could lead to weaker demand, which might hurt exports and production in other economies.
5. It’s Bernanke’s last hurrah!
Not to get overly sentimental or anything, but I’ve gotten pretty attached to this ol’ guy! His task of steering the U.S. economy out of the recession was a difficult challenge to say the least and, despite what several critics are saying, I think he’s had an impressive run.
Now it’s up to incoming Fed Chairperson Janet Yellen to make sure that the progress made in Bernanke’s term is sustained, and I’m sure we’ll see plenty of interesting developments starting next year. Do you think she’ll keep the ball rolling when it comes to tapering though?