September FOMC Statement Analysis And Forecast

Newsletter

Zero spam.

The FOMC just released its September Statement with several surprising changes, here is a quick view of what was changed and what was not:

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months [previous “economic activity decelerated somewhat over the first half of this year”]. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed [previous “Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year”]. The housing sector has shown some further signs of improvement, albeit from a depressed level [previous “Despite some further signs of improvement, the housing sector remains depressed.”]. Inflation has been subdued, although the prices of some key commodities have increased recently [previous “Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline”]. Longer-term inflation expectations have remained stable.

Verdict: Slightly Positive – Fed mentioned economy expanded, housing sector improvements, and inflation under control.

3rd Party Advertisement

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions [previous “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 also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

Verdict: Slightly Negative – Fed is worried that without further help, economy won’t recover.

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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month [new measures introduced]. The Committee also will 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. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative [summarizes current measures and objectives].

Verdict: Negative – Fed announces $40B per month in MBS purchases (QE3?) and maintains Operation Twist, signaling that US economy needs assistance to recover.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases [new section describing the new program and what the Feds will do in the future].

Verdict: Negative – Open ended program gives the Fed maximum flexibility but also keeps the market on watch for more easing by the Feds.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015 [previous “late 2014”].

Verdict: Negative – Forward guidance extended by 6 months into 2015.  Fed will keep QE running after economy recovery is in place, signaling even more bearish tone for the USD.

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 opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

All in all in this FOMC Statement, I’ll have to say that it is negative for the US Dollar, especially considering the last paragraph (not counting the vote counts) where the committee expects current easing policy to remain in effect even after the economy starts to strengthen, basically telling everyone in no uncertain terms that the Fed is willing to tolerate higher inflation in exchange for stronger economic recovery… this is in my opinion, the most important point and the primary focus of the entire statement.  Of course, the part where the Fed talks about that unless “labor market improve substantially” further easing is coming, ranks a close second, but nothing says more about the FOMC state of mind than the acknowledgement that inflation does not count anymore, makes you wonder if the dual mandates for the Fed have evolved to a single mandate, Maximum Employment.

I am now convinced that USD will suffer massive sell-offs in the coming weeks, not only based the fact that QE3 has been announced, but also on the fact that the Feds have made their policy clear, maximum employment.  As long as the labor market has not “improved substantially”, I believe the Fed will continue with the new MBS purchases of $40 billion per month, or new measures will announced.  As far as the terms “substantially”, Bernanke said that he does not have a fixed number, but what happened in the last six month “ain’t it”.  So it is safe to say that Bernanke is definitely looking for 150K or more per month, which pretty much guarantees further easing in the future.

I’ll be going LONG on the EURUSD, it is just a matter of time to see 1.3200 level in my opinion.

 

FUNDAMENTALS
Forex Weekly Outlook May 22 ~ 26, 2017
Forex Weekly Outlook – May 15 ~ 19, 2017
Daily Newsletter Is Back!
Key Facts For The Upcoming FOMC Meeting
Interest rates too low for too long could cause financial instability: Fed’s Bullard
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.

You can find more information about me on my Google Profile.

Comments

  1. Mr Liu, I submit that your posting are very insightful and i have learnt so much from you, but i don’t think they have changed their dual mandate yet, inflation is still within considerable range, meaning it is still controllable this means they can still continue with Q.E until inflation begins to get out of a comfortable zone.

    • Yes, but the fact that they are allowing QE to continue even when the economy is recovering means they are willing to tolerate higher inflation, the core CPI is now at 1.9% for the month of August, and that’s pre-QE3 reading. Imagine if they keep rates unchanged until 2015, where would the CPI be considering the massive inflationary pressure brought on by the QE3? most central banks will hike rates at 2.0% (core), I don’t think the Feds will do it as they may allow inflation to go to 3.0% or more, thus ignoring their other mandate. If employment remains weak, I have no doubt that they will not raise rates even if CPI reaches 3.5%.

  2. hi mater liu,
    your comments are always enlightening & a good foundation for my trading

  3. I just want to say, a million thanks to master Liu.

    Regards

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 launch QE3 and extended the forward guidance to 2015. 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 Post September FOMC Statement Analysis. […]

  2. […] the U.S., the Fed launched the third round of quantitative easing (QE3) this week, promising to buy MBS (Mortgage Backed Securities) in order to boost employment. Chairman Bernanke […]

  3. […] the U.S., the Fed launched the third round of quantitative easing (QE3) this week, promising to buy MBS (Mortgage Backed Securities) in order to boost employment. Chairman Bernanke […]

Speak Your Mind

*

Newsletter

Zero spam.