No tricks nor treats from the Fed this Halloween! In its very first monetary policy meeting following the announcement of QE3, the central bank decided to maintain its wait-and-see approach.
Interest rates were left untouched between 0% and 0.25%, as the Fed renewed its promise to keep rates within this range at least until mid-2015.
Bernanke and his merry men have also decided to carry on with purchasing $40 billion a month of mortgage-backed securities until they think the economy is strong enough to stand on its own. How long will that take? Who knows!
Aside from its QE3 package, the Fed will also keep Operation Twist in its arsenal. The program involves swapping $45 billion worth of short-term securities for long-term Treasuries in order to keep long-term interest rates low.
As for the economy, Bernanke had both positive and negative feedback.
Let’s start with the good news:
- Economic activity has been consistently rising and has maintained a moderate pace of growth.
- Household spending has been picking up.
- The housing market has managed to show further improvements.
- Inflation has risen a bit, quelling fears of deflation.
But the bad news is that:
- The job market still hasn’t shown significant signs of recovery.
- Business fixed investment growth has been losing steam.
The market’s initial reaction to the FOMC decision was… well, unexciting. EUR/USD shifted slightly higher, but the move was slow and choppy. When the U.S. trading session ended, the pair was right where it had been prior the announcement.
Based on the statement, it was pretty clear what the Fed wasn’t in a hurry to do anything yet. The central bank wants to take some time to see its policies take effect before even thinking of an exit strategy. What the Fed is looking for here is SUSTAINABLE growth, and not just “one-time” positive effects.
But given the current macroeconomic environment and the growth outlook, it seems that changes to monetary policy are still far off. However, I think there’s still a small chance that the Fed could expand its open-ended QE3 program in its next meeting when Operation Twist comes to an end. Operation Twist spends around $45 billion a month, so we could see QE3 be expanded by the same amount.