The Federal Market Open Committee meeting took place a week ago and the Fed meeting seems to remain the main news headlines ever since. Even though problems popped up in China, the Federal Reserve tapering question remains in the spotlight. Every investor, every speculator and ever market analyst seems to have their own take on Mr. Bernanke’s comments. Fed Chairman Bernanke tried his best in his comments and press conference to try to take confusion and misinterpretation from the markets. He told plain and simple, that the Fed would consider tapering its monetary policy when the economy was strong enough to handle a cut back. He did not indicate what, when or to what extent, he left this question open to economic data and recovery. He also indicated this would be a slow process not a turning off or on of a switch.
In the press release the FOMC acknowledged that there has been “further” improvements in the labor market (compared to “some” improvements in the previous statement). The Fed seemed to downplay the actual soft inflation environment by mentioning that it is “partly reflecting transitory influences”.
The rest of the statement was largely unchanged. Again, the Committee said it stands ready to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. The Fed left interest rates at zero and its asset purchase program unchanged at US$85 bn/month (of which $40 bn is MBS debt and $45bn is long-term Treasuries). It also reiterated that “exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored”. The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Fed restated that it will keep up the asset purchases until the outlook for the labor market has improved substantially.
Mr. Bernanke went out of his way to make sure that markets should understand that altering the stance of monetary policy remains data-dependent. The current economic projection is consistent with a gradual scaling down of QE3 by the end of this year and most likely ending by mid-year 2014 as the unemployment rate declines to 7% according to the new forecast released at the end of the week.
The fact remains that when the Fed’s begin to taper or cut back the economy will be well on its way to recovery and that fundamental data should balance the value of the greenback. Granted yesterday’s data release ranging from durable goods, to consumer confidence, housing sales and manufacturing excelled well above expectation would indicate that the economy is well on its way to recovery and signal a hastened decision to taper, but if the Fed’s begin to slowly taper, do you think the dollar will come tumbling down or soar above the 83.00 price range that is current maintains. Will the GBP fall below the 1.54 level where it is trading this morning or will the euro simply collapse and tumble from the 1.3070 price this morning to the forecast range of 1.25 at the end of the year.