The FOMC just released its September Statement with several surprising changes, here is a quick view of what was changed and what was not:
Verdict: Slightly Positive – Fed mentioned economy expanded, housing sector improvements, and inflation under control.
Verdict: Slightly Negative – Fed is worried that without further help, economy won’t recover.
Verdict: Negative – Fed announces $40B per month in MBS purchases (QE3?) and maintains Operation Twist, signaling that US economy needs assistance to recover.
Verdict: Negative – Open ended program gives the Fed maximum flexibility but also keeps the market on watch for more easing by the Feds.
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.
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.
September FOMC Statement Analysis And Forecast
September 13, 2012 by 7 Comments