This Wednesday, the United States Federal Reserve kept its benchmark interest rate unchanged at 0 to 1/4 percent, a record low. The decision to leave rates unchanged was widely expected but the statement released around 2:15 ET had a very mixed reaction among traders and institutional investors. Initially, Treasuries sold-off and the dollar rallied sharply against the most popular currencies. However, an out of the blue change in investor’s sentiment towards more risk-taking, possibly caused by an impressive rally in stocks, made the dollar exchange rate give back most of its early gains. In sum, the Federal Open Market Committee said that even though “conditions in financial markets have improved further in recent weeks” the committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”. Conversely, because the current “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 committee has decided to gradually slow the pace of Treasury securities purchases. “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”. But that said, this is certainly the beginning of the end for quantitative easing, an event that is likely to propel a rally in treasury yields and provide support to the US dollar in the months ahead.
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