12 srpna 2009

12/8 The FOMC Statement: Hawkish or Wait and See?

Pripravil John Hardy, FX Strategist, Saxo Bank

The FOMC statement released today was mostly on the hawkish side of expectations on the surface of the initial statement at least. The Fed funds rate is to remain unchanged at the 0.00% - 0.25% target range.

However, the Fed announced that it would "gradually slow" its purchases of Treasuries through this October (the previous goal was September,) and did not change the amount of purchases it intended to make (which were previously set at $300 billion).Other asset purchase plans, such as mortgage-backed securities and agency debt, were left unhcnaged.

The Fed indicated that it aimed for a "smooth transition" to ending the treasury buying program - perhaps thus hinting at an exit strategy down the road. The announcements on the Fed's QE measures were rather hawkish after the BoE recently expanded its asset purchase despite clear signs of an improving economy. In judging the strength of the economy, the Fed only indicated it saw consumption showing "signs of stabilization".

Going forward, it indicated that inflation would be "subdued for some time" and that the economy will be "weak for a time". All in all, one could argue that this is a real "wait and see" stance from the Fed. Some could argue that the Fed is preparing an exit strategy by stepping off the gas on QE, while others would argue that the Fed is satisfied with what it has wrought so far, but would like to save some bullets for the future as it recognizes (not publicly!) that it has zero forecasting ability and wouyld like to have something to offer in reserve in the event of a double dip scenario as the recent stabilization may merely the result of the unprecedented monetary blitz. We lean a bit more toward the latter scenario.

The outlook for the USD is relatively unchanged after this announcement - the USD is showing vigorous signs of strength that we look to see follow through in the coming few weeks as the Chinese economy comes under fire, the relative strength of non-US economies compared to the US fails to impress, and as the world seek safey from its overly ambitious bets in risk corners of the markets all around the world since March of this year. As of this writing, long US treasuries are actually recovering a bit, and if they continue to do so, the JPY shorts could get burned severely for the second time in the last few days.

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