FOMC Pursues MBS Purchases, Extends Rate Pledge- Bernanke In Focus

THE TAKEWAY: FOMC To Purchase MBS, Extends ZIRP Pledge > Will Continue to Embark On ‘Operation Twist’ > U.S. Dollar Whipsaws Ahead Of Updated Forecasts, Bernanke Testimony

The Federal Open Market Committee took additional steps to tackle the slowing recovery and announced it would purchase $40B a month in Mortgage-Backed Securities, while the central bank extended its zero-interest rate policy (ZIRP) pledge out to the second-half of 2015. At the same time, the Fed stated that it would increase the scope of its MBS purchases should job growth deteriorate further, and did not specify a timeframe on the non-standard measure as the committee continues to carry out ‘Operation Twist.’

The Fed continued to take note of the ongoing slack in the real economy, highlighting the protracted recovery in the labor market, while Richmond Fed President Jeffrey Lacker continued to dissent against the majority and voted against the new initiatives.

Indeed, the FOMC announcement produced a whipsaw-like reaction in the EURUSD, but we’re seeing the exchange rate hold steady as market participants turn their attention to the press conference with Fed Chairman Ben Bernanke on tap for 14:15 ET. As the Fed refrains from embarking on an unlimited buying program, currency traders may start to scale back their bearish forecast for the USD, but the fresh batch of central bank rhetoric may provide a clear directional bias for the greenback as market participants weigh the outlook for monetary policy.

In turn, the dollar may hold the 100+ pip range going into Bernanke’s speech, but a very dovish statement may spur further weakness in the USD as the Fed continues to carry out its easing cycle.