US FOMC Interest Rate | January 30, 2013 | Currency News

The entire financial world will be paying attention to today’s FOMC Statement, although the primary focus will be on Bernanke’s tone as to the FOMC’s stance on the continuation of QE. Of course, since the last release of the FOMC Meeting Minutes. three members of the Federal Reserve expressed their views that QE may end in 2013, which resulted in a major rally for the dollar, but this speculation was quickly squashed last week as Bernanke used his scheduled speech to reassure the market that the Feds are still continuing with QE for as long as it is needed, and that there are no evidence of inflationary pressure resulted from QE.

The market will definitely be looking out for languages or hints to Fed’s outlook on economy, and the potential of an early ending to QE… and if it is in the official statement, then most likely we’ll see strong moves in the USD…  Here’s a quick look at last month’s FOMC Statement with my own analysis…

December 12, 2012 FOMC Statement Analysis

Federal Open Market Committee surprised the market today by dropping the 2015 low rates pledge by changing to a target based policy.  Specifically, the FOMC pledges to keep rates low until unemployment rate is below 6.5% and Inflation is above the 2.5% target… This basically provided no set timeline for the Feds to keep rates at the current level, and will add to the USD selling trend…  Here’s the complete FOMC Statement compared to the previous (October) statement.

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions (talking about Hurricane Sandy). Although the unemployment rate has declined somewhat since the summer, it remains elevated (changed from “growth in employment has been slow, and the unemployment rate remains elevated”). Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices (changed from “inflation recently picked up somewhat, reflecting higher energy prices.”). Longer-term inflation expectations have remained stable.

Noting the effects of Hurricane Sandy and the fact that inflation is still under control… In short, there are no signs that inflation is driven by QE3, but rather by higher energy prices…

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. 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 will run at or below its 2 percent objective.

No change in this paragraph, which means the Feds recognized that the U.S. economic recovery is fragile…

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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month (Converting the monthly purchases for Operation Twist to QE3, after the end of Operation Twist). 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 and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Highly anticipated move by the market that the Feds will simply roll over the monthly purchases into the on-going QE3…  Nothing surprising here…

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 Treasury and agency mortgage-backed securities, 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.

No change in this paragraph here… Apparently the FOMC wants to keep its options open.

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 asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent (taken away the mid 2015 pledge and discusses thel approach to withdraw current stimulus).

Surprises the market as generally no one is expecting the Feds to make this kind of change in their statement in December.  The overall sentiment is positive as traders now feels that the Feds are much more transparent in their policy decisions.  I believe this is a positive sign for risk appetite…

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 the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

All in all, I see further strength in EUR, and further weaknesses in both USD and JPY.  We should see this trend continue into Q1 2013 as global economies recover…

Economic Forecast:

If the Feds were to stick to the Dec. projections, then there is really nothing much going on here as the Unemployment Rate is expected to drop the most to 7.4% in 2013.  If QE were to end sometime in 2013, the rate will have to fall below 7.3%, which means the market will get plenty of warning ahead of time…  Of course, that’s if the Feds were to stick to their guidance (which I think they will) and that this projection is still valid for this month.

All in all I don’t really expect much from this rate decision, but in case we get a surprise, we’ll get ready to act.  But since it may be difficult to interpret what is going on, it’s best to stay out of the market and read the entire FOMC Statement first before taking a position.  You’ll thank me later.

Here’s the link for the FOMC Statement, but it won’t be available until it has been officially release. So refresh the page until you get the report.

 

Thanks,