The Federal Reserve kept its benchmark interest rate unchanged at 0.25% to 0%, a record low. Yet, the FOMC statement was more bullish than had been anticipated judging by the subsequent rally in the US dollar. “Policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth”, the Fed said. More importantly, the Federal Reserve has decided to gradually slow the pace of Treasury securities purchases signaling an end to quantitative easing.
Official Statement from the Federal Open Market Committee
(Highlights from DailyFX)
"Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen."
Interest Rates Across the World (roll your mouse over the map to see rate levels)
source: tradingeconomics.com
Forecast for the US Dollar (published on 08/12/2009)
Alan Greenspan once said that “having endeavored to forecast exchange rates for more than half a century, I have understandably developed significant humility about my ability in this area”. I certainly did not spend 50 years researching exchange rates but I had my share of failed forecasts already. Having said that, in the near-term we think the US dollar is likely to remain under heavy selling pressure until the US Federal Reserve announces a clear exit strategy for quantitative easing. However, in the long-term, the resumption of economic growth in the United States is likely to influence the Federal Reserve monetary policy and lead to a positive shift of interest rate differentials in favor of the US dollar. So, because we have several opposite forces driving the current dollar exchange rate, we will probably see both the EUR/USD and USD/JPY trading in relatively tight ranges throughout the third quarter of 2009. In sum, look for opportunities to sell-short any major dollar rally but also don’t forget to buy excessive losses in the dollar exchange rate.
Antonio Sousa is a Chief Strategist for DailyFX.com at FXCM in New York City where he performs global economics research and develops systematic trading strategies. Please send your comments to <[email protected]>.