The Federal Reserve’s policy meeting on March 13 was decisively neutral. Indeed, with the statement accompanying the decision suggesting that sentiment among policymakers was broadly neutral, the minutes from the meeting – released at 18:00 GMT today – highlighted the recent ‘hawkish’ shift among voting members.
Equity markets plunged after the minutes were released, with the S&P 500 dropping approximately 9-points from its pre-release level. The AUDUSD and EURUSD sold-off with fervor, with the former dropping by 60-pips and the latter plummeting by 120-pips. The Japanese Yen was also substantially weaker, with the USDJPY climbing 80-pips after the release. Broadly speaking, the U.S. Dollar was the best performer with the Dow Jones FXCM Dollar Index (Ticker: US Dollar) cracking the psychologically significant 10,000 level.
EUR/USD 1-minute Chart: April 3, 2012
Charts Created using Marketscope – Prepared by Christopher Vecchio
Presented below are the key points from the FOMC statement.
- FOMC saw no need to ease anew unless growth slows, and officials saw economy “expanding moderately” last month.
- “Labor market conditions continued to improve and the unemployment rate declined further, though it remained elevated.”FOMC participants saw jobless rate gradually declining.
- Housing market “remained depressed”, expected housing to slowly recover.
- “Overall consumer price inflation was relatively subdued in recent months”. “Measures of long-run inflation expectations remained stable. Most FOMC participants expected inflation rate at 2% or less.
- Near-term forecast for real GDP growth revised up slightly. In its March forecast, the FOMC”s projection for real GDP growth over the medium term was somewhat higher than in January, mostly reflecting an improved outlook for economic activity abroad, a lower foreign exchange value for the dollar and a higher project path of equity prices. FOMC continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013.
- Significant outlook change could alter 2014 rate plan.
- Economy facing continuing headwinds, members generally expected a moderate pace of economic growth over coming quarter with gradual further declines in the unemployment rate.
- A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.
Was the market reaction following this commentary warranted? Perhaps not, considering these beliefs were well-established back at the March 13 meeting. Regardless, it is important to consider what will happen going forward. It should be noted that the meeting occurred before Chairman Ben Bernanke opened up the last week of March with remarks that more easing could be warranted should the labor market continue to struggle.
By no means is this a suggestion for more QE – I am ardently against more easing – but rather a reminder that Chairman Bernanke has already eased off the hawkish tones in the time period between the March 13 meeting and the release of the minutes on April 3. Should economic conditions deteriorate over the coming weeks - slow growth out of Asia and Europe will hurt the U.S. economy - the FOMC's tone could revert quickly.
--- Written by Christopher Vecchio, Currency Analyst, and Tzu-Wen Chen, DailyFX Research
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