The FOMC meeting on March 19 surprised the market by dropping the quantitative forward guidance (threshold based forward guidances, such as 6.5% unemployment rate and 2.5% CPI in a 6 ~ 12 months forecasted) and moving to a more vague, qualitative guidance that encompasses everything, here’s the paragraph straight out of the FOMC Statement:
In essence, Feds are now focuses on fundamentals when it comes to deciding their monetary policies, while they are still mindful of the “dual mandate” (price stability and maximum employment), they feel that “there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions“, hence the across the board gain in the USD. Furthermore, based on the projections by Fed officials on the timeline for rate hikes, an overwhelming 63% of them believe that rates will rise to 1.00% or above by the end of 2015. Here are some assumptions based on the current pace of tapering:
Now the first 3 points have been priced in ahead of the FOMC meeting, but with Yellen explaining that “considerable period” is about 6 months during the Press Conference, the entire market was taken by surprise. The signal was that not only the Feds will hike rates more than market expectations (1.00% or more by the end of 2015), but will do so sooner than expected in as little as 6 months after asset purchases end.
The real question is, is this apparent “slip” a calculated response or a rookie mistake? I guess if you were watching the press conference, you’d get the impression that it’s probably a rookie mistake, but nothing should be taken away from it because Yellen probably believes it to be true deep down, although she should have prepared the market better, or she may end up like Bernanke with the “Tapering in September” disaster.
So what happens next for us Forex traders? Well, I expect to see more market focus on U.S. fundamentals, something that I’ve been waiting for in the past few years ever since the sub-prime mortgage crisis. It also means that more news events are going to be tradable and the USD is likely to remain well supported until at least the end of 2014, provided that we don’t get some disastrous Nonfarm Payroll report.
Fed Yellen’s Debut: Calculated Response Or Rookie Mistake?
March 20, 2014 by 1 Comment