Here’s a quick analysis for today’s FOMC Statement as the Feds decided to keep rates unchanged at 0.25% with no new announcements for further Quantitative Easing (QE3) measures. The changes are in RED while the previous are in BLUE.
Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year [prior statement: “economy has been expanding moderately this year”]. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
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. 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.
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it 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 will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed [prior statement: “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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.
How to interpret this statement?
As we can clearly see, the FOMC statement remains largely unchanged compared to the previous statement, roughly along the same lines of Bernanke’s testimony in front of Congress a few weeks ago. Some analysts are saying that because of the language in the first paragraph where the FOMC acknowledged decelaration of the U.S. economy, the justification for QE is there, especially considering the carefully chosen words of “will provide additional accommodation” in today’s statement versus “prepared to take further action”, as the former one implies a plan and the latter one implies planning for a plan…
I am definitely expecting further weakness in the USD, although the market is acting in contrast of the statement due to the lack of new forward guidance or easing measures, but I believe the Feds are now closer to QE3 than before, and I would be looking to SELL USD after the initial ‘buy on rumor, sell on news’ reaction wears off.
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August 1, 2012 by 2 Comments