Following the FOMC’s meeting on Wednesday, the Federal Reserve is set to release a litany of communication, from economic forecasts and Chairman Bernanke’s press conference to interest-rate projections. These statements will offer markets ample opportunity to speculate on the future of US monetary policy, with potentially noteworthy effects on the US Dollar.
In recent months, the Greenback has become much more sensitive to expectations about the Fed’s policy direction. With the central bank alternating betweencontinued support for loose policy and a more hawkish tone, the Greenback has seen increased congestion. As a daily chart of the Dow Jones-FXCM Dollar Index shows, the Dollar has been trading within an increasingly narrow band since mid-March, unable to penetrate either support at the 9,900 level or a clear downward-sloping resistance line.
Chart generated by author using FXCM Netdania
Besides feeding congestion in the Dollar, greater attention to this “tightening versus easing” debate has fueled the belief that an important policy change is on the horizon. However, US Dollar traders should resist the temptation to assume that any major shift – either in the direction of loosening or tightening – is imminent.
A useful reference point is the monetary policy stance of voting FOMC members in this year and in 2013. By examining statements, speeches, and voting records since the 4th quarter of 2011, we can map out FOMC biases as follows:
Chart generated by author based on FOMC Jan. and Mar. Minutes, news articles from Bloomberg, NY Times, and Reuters
A first glance at the chart reveals that the FOMC continues to exhibit an overall dovish bias. In fact, the rotation in voting members at the end of this year should confirm this bias even further, with the most hawkish current member – Jeffrey Lacker of the Richmond Fed – forfeiting his vote. Since Lacker has been the only member explicitly calling for interest-rate hikes before the current late-2014 timeline, we can expect the Fed’s low-rate pledge to hold. Large-scale reductions in the Fed’s $2.9 trillion balance sheet are also, as a consequence, unlikely during the 2012-2013 period.
Statements from the dovish camp, therefore, will carry far more weight moving forward. But recent developments have implied that this group is no longer as inclined to further drastic easing measures as it was in the 4th quarter of 2011. For one, there have been far fewer explicit proposals throughout the 1st quarter to expand the Fed’s asset purchases; the Boston Fed’s Eric Rosengren remains the only one to have put forth such a concrete proposal in the more recent months. John Williams, the San Francisco Fed President, even suggested a “reduced probability of needing to do additional stimulus” on Apr. 4.
Overall, the stances of the FOMC members suggest that the status quo is here to stay, both in this year and 2013. Of course, the Greenback will continue to fluctuate as economic data and statements from Fed officials shape market expectations about monetary policy shifts. Barring any severe downturn in the US economy, however, traders should not expect any of these speculation-based Dollar moves to see confirmation in actual drastic policy action from the Fed.
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