THE TAKEAWAY: [Fed Chairman Bernanke speaks after FOMC holds key interest rate and extends Operation Twist] > [Rates expected to stay low till late 2014, further easing possible] > [USD gains]
Earlier today, the Federal Open Market Committee (FOMC) announced its decision to hold its key interest rate at 0.25 percent. Instead of easing further through a third round of quantitative easing, or QE3, the FOMC opted to extend ‘Operation Twist’ until the end of 2012. The extension will result in another $267 billion of sales and purchases of Treasury securities in the 6 to 30 year bond range. The FOMC also released its latest projections for the U.S. economy. Compared to its April projections, the Fed officials now anticipate a slower rate of economic growth, higher unemployment and lower personal consumption expenditure (PCE) inflation over the next three years.
Federal Reserve Chairman Ben Bernanke subsequently held a press conference, elaborating on the FOMC’s rate decision and economic outlook. In his address, Bernanke noted that the U.S. economy is expanding at a ‘moderate pace’, although he acknowledged that the Fed’s prior outlook was ‘too optimistic’. Meanwhile, employment growth had slowed and the housing market was doing ‘somewhat better’ though it remained lackluster. With the market closely watching for signs of further Fed action to come, Bernanke maintained a moderately dovish tone, reiterating that the FOMC expects to keep rates low until late 2014 and that it would consider additional monetary policy easing.
Key comments from Chairman Bernanke’s press conference are summarized as follows:
- FOMC maintaining highly accommodation policy
- Reiterates FOMC prepared to do what’s necessary and still has ‘ammunition’
- Fed would consider additional asset purchases, but monetary policy is not a panacea
- Reiterates Fed expects rates to remain low until late 2014, says ‘we can lower interest rates more’
- Fed continuing “Twist” program should push down long-term interest rates
- Fed can still provide support for economy and monetary policy still has capacity
- Fed tools can create more accommodative conditions
- QE programs were effective in supporting economy. QE2 ended possible incipient deflation problem
- Economy expanding at moderate pace
- Fiscal restraint at government levels
- Business, household spending rising moderately
- Employment gains smaller in recent months. Unemployment at 8.2% is ‘elevated’
- Most on FOMC expect only slow progress on jobs
- Fed looks for sustained labor market improvement and is ready to do more if no progress.
- Labor data month-to-month will pose ‘noise’.
- Inflation has declined recently. FOMC expects inflation to be at or below 2%.
- ‘The outlook has changed’. Fed was too optimistic previously.
- Prolonged Operation Twist is a ‘substantive step’
- Incoming economic data were somewhat disappointing
- Safe haven flows pushing down interest rates
- Sees economic effects from fiscal cliff uncertainty. Investors would like to see sustainable fiscal policy
- Fed U.S. fiscal policy may inhibit economy. A goal of fiscal policy should be ‘do no harm’
- Access to credit ‘a major issue’. Tight credit ‘mutes’ actions by Fed
- Sees positive impact from lower interest rates
- Europe is ‘slowing U.S. economic growth’. Slowing in global growth inhibits U.S. exports
- European financial market concerns cause volatility
- Housing doing ‘somewhat better’ though U.S. not getting usual boost from housing
- Is ‘hopeful’ Europe will take additional measures
- Fed monitoring ‘exposure’ of banks to Europe and is prepared in case Europe gets worse
- Economic projections have a lot of uncertainty
- Large asset purchases to make ‘exit’ longer process and may have market implications.
- Non-standard monetary policies have ‘costs and risks’ and are less well understood
- Fed won’t be buying European sovereign debt
AUDUSD 1-minute Chart: June 20, 2012
Chart created using Market Scope – Prepared by Tzu-Wen Chen
Increased calls to implement QE3 over the last few days had put downward pressure on the greenback. However, the U.S. dollar regained ground after the FOMC opted to extend Operation Twist instead.
During Bernanke’s conference, the U.S. dollar pared earlier declines against higher-yielding, risk-correlated currencies, with the greenback strengthening as much as 65 pips against the Australian dollar. At the time of this report, the AUDUSD pair was trading at $1.0171.
--- Written by Tzu-Wen Chen, DailyFX Research