What happened during the statement?
Once again, Big Boss Bernanke played coy with the markets, as we didn’t see any major changes during the FOMC statement. The Fed kept benchmark rates steady at below 0.25% and didn’t alter its current monthly bond purchasing budget of 85 billion USD.
The central bank also said that as long as inflation remains below 2.5% and the unemployment rate above 6.5%, policymakers won’t be making any changes any time soon.
As for when the Fed may change its policies, Bernanke basically said that it would continue to monitor the progress of the economy. In fact, the exact words that he used were “to calibrate the amount of accommodation”. This basically means that Fed could either increase or decrease the amount of bond purchases depending on the strength (or weakness) of the economy.
What does the Fed think of the U.S. economy?
Bernanke actually acknowledged the recent uptick in employment last February, although he did express caution. He pointed out that over the past few years, we’ve seen job growth spike during the winter months, then taper off the next few months thanks to the “spring slump”.
As for the entire economy, the Fed also noticed improvements across various sectors, but also pointed out that it remains vulnerable to potential risks. It appears that the Fed is being extra cautious right now and wants to make sure that any improvement in economic data has a strong foundation and isn’t merely a temporary improvement.
What do they expect from the U.S. economy in the future?
The Fed is foreseeing slightly weaker economic growth for the year as they cut their annual GDP forecast from a range of 2.3% -3% to just 2.3%-2.8%.
The good news though is that they are expecting better prospects for the labor market as they lowered their unemployment rate forecast from a range of 7.4%-7.7% to just 7.3%-7.5%. However, this is still way above the targeted 6.5% jobless rate that’d push the Fed to hike interest rates or reduce monetary stimulus.
What’s interesting about the recent Fed statement was that Bernanke barely addressed the potential impact of the sequestration spending and job cuts on overall economic growth. Some market watchers interpreted this as a sign that the Fed head isn’t too concerned about the negative repercussions of these budget cuts or that he believes the U.S. economy is strong enough to withstand these headwinds.
What do all these mean for the U.S. dollar?
One of the biggest takeaways from the recent FOMC announcement is that the central bank is still watching unemployment and inflation very closely. With the Fed relying on economic data to dictate the pace of their asset purchases or possible interest rate changes later on, the U.S. dollar could be very sensitive to fundamental factors in the coming months.
Several analysts were quick to point out that, regardless of whether the Fed speeds up or slows down the pace of their asset purchases, it is still monetary policy easing at the end of the day. This means that markets might not be strongly bullish on the U.S. dollar unless the Fed actually starts withdrawing some of the stimulus.
Given the Fed’s recent economic forecasts and potential challenges to the U.S. economy, number crunchers over at Wall Street predict that the Fed might not start slowing down its pace of asset purchases until next year. More optimistic economic seers say that the Fed might consider ending its QE program within the first three months of 2014.
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