FOMC Keeps Policy on Hold, U.S. Dollar Jumps on No QE3
The Federal Reserve’s policy meeting today went off with the fireworks that were anticipated, but not in the direction expected given the outcome that was expected. Markets were pricing in the potential for further easing measures to be announced today, though the Federal Reserve’s Open Market committee withheld additional stimulus at present time. This outcome shouldn’t have been a surprise either, given the recent uptick in U.S. economic data, but price action following the decision suggests otherwise.
Equity markets plunged after the meeting, with the S&P 500 dropping approximately 10-points from its pre-meeting level. The AUD/USD and EUR/USD sold-off with fervor, each dropping over 60-pips following the decision. Global funding concerns are becoming a stark reality with each passing day, and the U.S. Dollar demand that spiked following the rate decision underscores the panic in markets right now.
Charts created using Strategy Trader– Prepared by Christopher Vecchio
Presented below, without commentary, are the key points from the FOMC statement.
- Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth.
- While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed.
- Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.
- The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.
- To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September.
- The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
The statement ended with the following lines, before noting that the decision was 9-1 in favor of current policy, with Charles Evans dissenting, calling for additional policy measures at present time:
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.
Going forward, now that stimulus from the Federal Reserve and the European Central Bank (per last week’s rate decision press conference) are off the table, we remain skeptical that markets can continue to limp higher in the face of increased economic uncertainty. While the Federal Reserve’s decision to hold off on further intervention is welcomed, the lack of resolve in the Euro-zone debt crisis suggests that the beginning of 2012 will be tumultuous across asset classes.
--- Written by Christopher Vecchio, Currency Analyst
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