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FOMC Meeting in Focus as Markets Look for Stimulus Signal

FOMC Meeting in Focus as Markets Look for Stimulus Signal

2011-09-19 04:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist

At the Jackson Hole Economic Policy Symposium in late August, Federal Reserve Chairman Ben Bernanke did not announce another round of stimulus. He did, however, note that the Federal Open Market Committee’s meeting in September would be extended by an additional day so that all potential policy options could be discussed thoroughly. Markets have seemingly taken this as a signal that if another round of quantitative easing is going to be announced, it would be at the September meeting. Now, with the meeting set to conclude on Wednesday, the future of the U.S. Dollar hangs in the balance, as another round of easing would boost risk-appetite and undercut the value of the Dollar for months to come.

AUD Reserve Bank's Board August Minutes: September 20 – 01:30 GMT

At its meeting on September 6, the Board of the Reserve Bank of Australia voted to leave the cash rate unchanged at 4.75 percent. Governor Glenn Stevens noted that “conditions in global financial markets have been very unsettled over recent weeks….as a result, the outlook for the global economy is less clear than it was earlier in the year.” The Reserve Bank of Australia continued to say that growth was slowing. Governor Stevens’ statement included a note that some “temporary impediments” to growth, such as the supply-chain disruptions from the Japanese earthquake as well as higher commodity prices, were “lessening.” The statement afterwards also suggested that “employment has been moderate this year” while “CPI inflation should start to decline.”

Given these observations, it appears that the Reserve Bank of Australia is becoming increasingly dovish. While concerns over the Australian economy are limited in scope, any pullback in Australian growth is likely to be provoked by broader global macroeconomic trends. This has translated into a weaker Australian Dollar over the third quarter of 2011, as interest rate expectations have deteriorated sharply in recent weeks.

GBP Bank of England Minutes: September 2108:30 GMT

On September 8, the Bank of England voted to maintain the key interest rate at 0.5 percent. The Monetary Policy Committee also maintained the target of its bond program at £200 billion. The country’s inflation rate increased back to 4.5 percentin August from 4.4 percent in July, though the central bank looks unlikely to raise rates despite price pressures persisting at more than double its target of 2 percent.Despite the high rate, policymakers at the Bank of England agree that the economic outlook is not stable enough to withstand higher interest rates.

Looking ahead, it is evident that the Bank of England’s Monetary Policy Committee is focused on economic growth rather than reducing inflation. This has been a trend that is emerging across the globe, with the Bank of Canada, European Central Bank, Federal Reserve and Reserve Bank of Australia all reaching similar conclusions. With economic recovery expected to be shaky in the short- and medium-term, the Monetary Policy Committee will likely hold the bank rate at 0.5 percent through the end of 2011.The minutes of the meeting will be published on September 17 and will include highlights of the board meeting as well as forecasts of future growth for the country. The key information will be the Bank of England’s decision in regards to expanding its asset purchase program. Join a DailyFX analyst for live coverage of event!

CAD Consumer Price Index (YoY) (AUG): September 21 – 11:00 GMT

The Canadian gauge of price pressures continued to slow in July, after hitting their highest such pace in eight years in May. Since then, the consumer price index level has cooled off considerably, dropping to 2.7 percent in July from 3.1 percent in August. A rebound is expected, however, back to 2.9 percent on a year-over-year basis. The forecast calls for a consumer price index reading of 0.1 percent for August, on a monthly basis, a drop of 0.1 percent from the 0.2 percent figure in July as well. The data comes after disparaging gross domestic product print on August 31, when the annualized GDP rate showed a 0.4 percent contraction after the pace was 3.6 percent growth in the first quarter.

A drop in output coupled with persistent inflation suggests that the Canadian economy may be heading toward a stagflating state, similar to the American and British economies. The index will be closely watched by the bank of Canada as their monetary policy decisions are major drivers for influencing the rate of inflation. Join a DailyFX analyst for live coverage of event!

Federal Open Market Committee Rate Decision (SEP 21): September 21 – 18:15 GMT

It is widely anticipated at the Federal Open Market Committee rate decision on September 21 that the Fed Funds rate will be kept unchanged between 0.00 and 0.25 percent. The key part of the meeting to watch will be Federal Reserve Chairman Ben Bernanke’s commentary addressing the economic slowdown and possible stimulus for growth. At the Jackson Hole Economic Policy Symposium, Chairman Bernanke said that further policy options would be discussed at the meeting. Due to this, the meeting is two days long as opposed to one. Policymakers have been quiet ahead of the meeting, and markets have reacted accordingly: equity indexes have floated higher on lower volume, and any spurt of bad news triggers losses followed by gains on speculation that a deteriorating economic climate supports further easing.

Another round of quantitative easing is an option that will likely be discussed. However, the economic climate is slightly different now than it was this time last year. In fact, while deflation was a major concern, inflation in the United States moved higher to 3.8 percent year-over-year in August, a clear sign that prices are unstable. Considering many have ridiculed the bond purchase program due to its tendency to inflate prices on a nominal basis, the additional round of easing may come in a slightly different form.

With concerns about liquidity in the foreground, the Federal Reserve may trim the interest rate it pays to banks for keeping their reserves at the Federal Reserve. With no return on the money parked at the Federal Reserve, there is an incentive to lend it out and collect interest payments. The FOMC meeting will be the most important event of the week. Join a DailyFX analyst for live coverage of event!

New Zealand Gross Domestic Product (YoY) (2Q): September 2122:45 GMT

New Zealand gross domestic product data surprised the market in July, when first quarter figures showed that the economy grew more than economists had expected. In fact, the economy grew more than double the forecast at 0.8 percent, well-above the 0.4 percent expectation, according to Bloomberg News. The strong growth has boosted the Kiwi in recent weeks and months despite a significant pullback in risk-appetite; the Kiwi is considering a riskier currency due to its relatively higher interest rate. That being said, the strong growth figures have tied into the expectation that the Reserve Bank of New Zealand could raise rates at their next meeting. Another strong GDP would further boost this prospect, catapulting the Kiwi even higher across the board. If growth slowed unexpectedly in the second quarter, however, those rate expectations would be siphoned out of the New Zealand Dollar, dragging it much lower on global growth concerns.

Rate Hike Probabilities / Basis Point Expectations (12-months)

FOMC_Meeting_in_Focus_as_Markets_Look_for_Stimulus_Signal_body_Picture_1.png, FOMC Meeting in Focus as Markets Look for Stimulus Signal

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

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