In his speech, he revealed that the Fed plans to end its QE2 program as scheduled in June, but it will continue to reinvest maturing debt once the $600-billion stimulus package expires. Of course, that was just a geeky way of saying “Yep! We’re maintaining the level of stimulus in the economy brothas!”
Another important note to take away from the April FOMC statement was the central bank’s take on inflation. Officials raised their inflation forecasts, predicting that consumer prices will peak at 2.8% this year even when the CPI report for March was already at 2.7%.
But what else did Big Ben and his buds talk about behind closed doors? Let’s look at the minutes to find out.
Investors could breathe a sigh of relief because the Fed seems more intent in tightening monetary policy rather than further loosening it. The committee said that for QE3 to happen, they will have to see extremely dramatic changes in the economy. Whew!
Almost everyone had their own ideas on how the Fed should go about exiting its uber-easy monetary policy, but they reached a consensus that the first step would be to stop reinvesting its profits from principal payments to mortgage-backed securities. Eventually, the Fed would also stop buying Treasury bonds.
Step two would then be for the bank to sell its assets.
By doing so, the bank will be able to clean up some of the excess liquidity in the economy. Most members think that they should only proceed to step two after the official cash rate has been raised. That way, the FOMC can cut interest rates if the economy takes a turn for the worse.
This is where the debate gets interesting.
The tug-of-war between the hawks and the doves is still neck-and-neck. The more aggressive ones say that the recent uptick in inflation is enough reason to increase borrowing costs. Meanwhile, the doves argued that a premature rate hike could dampen the country’s fragile economic recovery.
And so, market junkies think that the FOMC will take its time. Heck, we’ll probably even see Lady Gaga wear normal clothes in public first before the Fed actually raises rates!
So how did the dollar react to the statement? Drum roll please…
It may come as a surprise but the Greenback actually rallied against the euro at the wake of the release.
Perhaps it helped that traders didn’t really expect the FOMC to rock the airwaves any more than it did in March. Some naysayers even braced for more dovishness because commodity prices slipped a bit.
I think the committee’s holler to exit its currency monetary policy impressed investors. However, because the U.S. dollar rally wasn’t sustained (See how EUR/USD just bounced from support and traded higher?), I don’t think it was enough for the market to go on a dollar-buying frenzy.
Perhaps dollar bulls will get to rock the charts when the FOMC answers the question everyone is thinking about now. When will the Fed hike rates?