topheadline

Fed Likely To Announce More Quantitative Easing

Tuesday, 28 April 2009 22:08:39 GMT  |  Antonio Sousa, Chief Strategist

The U.S. Federal Reserve is widely expected to keep the Fed Funds rate unchanged at the 0.25%-0% range. “Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time” and the decision to keep rates at a record low will not surprise. However, this event-risk is a great opportunity for a “Buy the Rumor, Sell the News” type of trade since the release of the FOMC statement has the potential to cause a powerful wave of volatility. The U.S. dollar has been under selling pressure ahead of the rate decision on speculation the Fed will announce fresh measures of quantitative easing.

More Quantitative Easing May Crush the U.S. dollar

Since the last FOMC meeting, the Federal Reserve has been actively purchasing large quantities of government debt, agency debt and mortgage-backed securities to provide support to the mortgage and housing markets. According to the last FOMC statement, “the Committee decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.” However, because of the very limited short-term benefits of this type of monetary policy, several investors are beginning to express their concern about the long term fiscal sustainability of this plan. So, this Wednesday FOMC statement has the potential to squeeze the U.S. dollar if the Fed decides to implement more quantitative easing.

Central Bank Rates Across the World

Interest Rate Ranking for Major Currencies source: tradingeconomics.com

 

The U.S. economy continues to face its biggest challenge since the great depression

Despite the recent gains made by major stock market indices and despite the uptick in several economic indicators, the U.S. economy is still facing the largest economic downturn since the 1930s. Since the recession began in December 2007, more than 5 million jobs have been lost and the total number of unemployed persons in the United States is now estimated at 13.2 million. Still, even though a worsening of economic conditions in the United States may lead to further losses in stocks and commodities, it does not imply that the U.S. dollar exchange rate must depreciate against other currencies. In fact, during the last 12 months the U.S. dollar appreciated substantially against several of the world’s most heavily traded currencies because investors were reluctant to take leveraged positions on riskier currencies. In general, periods of severe economic crisis often lead to political instability in certain parts of the world and a sudden increase in investor’s uncertainty towards the future of the world economy may possibly trigger a new wave of flight-to-quality in the form of U.S. Treasuries purchases. Having said that, a strong demand from financial institutions seeking a safe-haven currency is likely to keep the U.S. dollar well supported in the second half of 2009.


Highlights from the previous FOMC Statement

“Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. 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 anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.”
 

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.
 

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars