Post FOMC Meeting Analysis – June 20, 2012

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FOMC Meeting Statement – (Note: Changes are underlined with previous statements in BOLD, new additions are in brown)

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated [Previous Statement: “Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated”]. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined [Previous Statement: “Inflation has picked up somewhat”], mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

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Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually [Previous Statement: “gradually”]. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

[New Addition:] The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities.  Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability [Previous Statement: “prepared to adjust those holdings as appropriate”].

Economic Forecast:

  • GDP:
    • 2012 GDP 1.9-2.4% (2.4-2.9% prior)
    • 2013 GDP  2.2-2.8%  (2.7-3.1 prior)
    • 2014 GDP  3.0-3.5%  (3.1-3.6% prior)
  • Unemployment:
    • 2012   8.0-8.2% (7.8-8.0% prior)
    • 2013   7.5-8.0% (7.3-7.7% prior)
    • 2014   7.0-7.7% (6.7-7.4% prior)
  • PCE inflation:
    • 2012   1.2-1.7% (1.9-2.0% prior)
    • 2013  1.5-2.0 % (1.6-2.0% prior)
    • 2014  1.5-2.0% (1.7-2.0% prior)
  • Core PCE:
    • 2012  1.7-2.0% (1.8-2.0% prior)
    • 2013    1.6-2.0% (1.7-2.0% prior)
    • 2014   1.6-2.0% (1.8-2.0% prior)

Press Conference/Q&A Highlights:

(US) Fed Chairman Bernanke:

  • Continuation of Operation Twist should help keep pressure off long-term rates
  • Fed is maintaining a “highly accommodative” policy
  • Unemployment levels at 8.2% remain elevated, see slower progress in reducing unemployment than was the case earlier in the year.
  • Most Fed members see downside risks to the outlook from lower growth and higher unemployment.
  • Lower inflation reflect lower energy prices. – Reiterates Fed prepared to take further action as needed.

Q/A Session:

  • Fed was perhaps too optimistic earlier in the economic recovery, outlook has changed, economy has faced additional headwinds to growth.
  • Fed has provided consistent stimulus to the economy, Operation Twist extension is a “substantive step.”
  • Incoming data since last meeting was somewhat disappointing, but was also somewhat unclear.
  • There is a case to be made that additional judgments are needed about where the economy is headed. Additional asset purchases would be among steps we would consider.
  • Fed still has ammunition, would not agree that the Fed is out of ammunition.
  • QE1 and QE2 had substantial and effective impacts. QE2 ended an incipient deflation problem.
  • Each of these nonstandard programs has costs, and “should not be launched lightly.”
  • Interest rates are quite low, we can lower rates further in the bond market. 
  • Unemployment is too high, is falling too slowly. If we do not see improvements in the labor market, Fed will take action.
  • We did take a “substantive step” today, prepared to do more. 
  • Fed is watching events in Europe closely, in close contact with other central banks but still in consultation mode, USD swap program has been useful.
  • The European situation is slowing US economic growth. Housing is improving, however economic recovery is not getting its usual boost from housing.
  • Month on month there will be statistical noise in jobs data; Looking for sustained gains.
  • Reiterates that the Fed has considerable scope to do more to aid the economy even when short-term interest rates are close to zero.
  • The example of the BOJ suggests central banks can do more even when rates are at zero.

How to intepret these statements and headlines?

Well, I think what happened with today’s FOMC Meeting in a nutshell is that the market expected the Feds to do something, and they did.  It was not as much as the market would like, but nevertheless if you discount the “buy on rumor, sell on news” speculations ahead of the meeting, we are definitely seeing weaker USD at the end of the day on risk appetite demands.  The real question is whether of not this sentiment is sustainable, and I believe it is or will be, if we don’t get any more negativity or world-ending news out of Europe in the meantime.

Considering Fed’s stance and the repeated comments on “preparing to do more”, and the change of language in the official statement (2nd to last paragraph) “prepared to take further action”, I believe the Fed is trying to send out a message that this is just a deposit, or a downpayment, and more is coming soon if the economy takes a dive… and I believe them… So now the focus is on Nonfarm Payroll releases in Q3 of 2012.

In the meantime, I will follow the SELL USD trend… Interestingly Bernanke managed to slip in his positive view that the economy will recover and that the gains in the jobs market should be sustained…  But until that happens, we should maintain our view of to SELL USD on rallies.

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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Comments

  1. Henry, i have found the reverse action yesterday. The USD SELLING rally doesn’t carry very long. Can you please explain on this? Thank You!

    • I think the USD strength is just temporary. The buy on rumor/sell on news action and perhaps some disappointment that the Feds only extended Operation Twist is carrying the stronger USD. But nevertheless, once the reaction is over, market should follow the long-term trend in my opinion.

  2. Nice prediction. But I didnt see this before my eu trade went to -123. I hope there will be some correction for LONG tomorrow or next week.

  3. Kennedy says:

    Hi Henry
    I’ve blown so many accounts before now, but since I started trading the news with you, all I can say is wow! so it’s really possible to predict the market

  4. Your master strategy Henry , is of course to help others , and thereby reap abundance in large measure. The strategy is succeeding and you are changing the lives of many people for the better I’m sure.
    As a novice and retired businessman you have changed mine . Thank you from the bottom of my heart.
    God bless you,
    Garth

  5. Henry Liu, great job. Your consistency and persistence at delivering top notch analysis is second to non. Thanks and God bless

  6. Missang Oyama says:

    Hi Henry,

    Many thanks for your clear-cut precision in market analysis and direction.I can’t appreciate you a enough for the wonderful job you are doing.God bless you.

  7. Francisco says:

    Thank you so much Henry for your valuable work and insight, I really appreciate it

  8. chandra says:

    thanks sir for your tremendous effort,,, your view and perpective, have given some hints about the market movement… Thanks again for the good job..

  9. Thanks so much Henry, please do you mean we should buy Eur/Usd??

Trackbacks

  1. […] The entire financial world will be paying attention to the meeting minutes from the last FOMC meeting where the Federal Reserve decided to keep rates unchanged but extended the ‘Operation Twist’ to the end of the year…  Market will be looking for signs on further QE potentials in today’s minutes.  See the entire analysis of POST FOMC Meeting here… […]

  2. […] U.S., the FOMC extended Operation Twist through the end of 2012 on Wednesday, but markets were largely disappointed; as a matter of fact, some analysts felt that the Fed […]

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