FOREX ALERTS >>
DailyFX Plus Login

topheadline

Article

Fed Keeps Rates Unchanged but FOMC Statement Triggers a Dollar Sell-Off
Wednesday, 18 March 2009 15:48:47 GMT  |  Antonio Sousa, Chief Strategist
Delicious
Facebook

As widely expected, the US Federal Reserve made a unanimous decision to keep the Fed Funds rate unchanged at the 0.25% to 0% range, a historical low.  However, the FOMC statement was more dovish than expected and the U.S. dollar sold-off on the news that the Federal Reserve decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. In other words, the Fed has a real concern about deflation and its governors will do whatever it takes to deal with it including quantitative easing.

Federal Reserve Leaves Rates Unchanged

This Wednesday, the Federal Open Market Committee of the US Federal Reserve made a unanimous decision to keep the Fed Funds rate unchanged at the 0.25% to 0% range. The rate decision was not a surprise for a good number of investors since the Federal Reserve stated clearly on its last FOMC statement that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”. Even so, today’s FOMC statement sounded a bit more dovish than expected, not reflecting the positive performance of the U.S. stock, bond and credit markets over the last two weeks. The Federal Reserve said "it 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 addition, "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." So once gain, the Fed said it will employ all available tools to promote the resumption of sustainable economic growth and this makes us believe that the Fed will continue to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets. In other words, the Fed will use quantitative easing.

Currency traders reacted very negatively to the FOMC statement driving the U.S. dollar lower against the world’s most heavily traded currencies.

Fed Reaction
 source:TradeStation

Federal Open Market Committee Statement
(With highlights from DailyFX)

"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

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.  "


The Next Fed Meeting in on April 29th but Rates Should Remain Unchanged

The next FOMC meeting is on April 29th and there is a 90 percent probability the Federal Reserve will leave rates unchanged, according to 90 day Eurodollar LIBOR futures traded on the Chicago Mercantile Exchange. Yet, I expect the U.S. dollar to perform relatively well in the months ahead on speculation that the Federal Reserve will be more aggressive than other major central banks on its fight against deflation. In fact, I will not be surprise if Ben Bernanke announces more powerful initiatives to fight deflation and promote sustainable growth in the weeks ahead and this could provide support to the safe-haven status of the U.S. dollar.

FFImpliedDistribution



Written by Antonio Sousa, Chief Strategist for DailyFX.com
To contact the author of this report, e-mail asousa@fxcm.com

More Articles

Feedback Form