Forex Analysis For US FOMC Interest Rate
Henry Liu | Nov 02, 2011 07:22AM ET
Today’s FOMC meeting goes back to the new format where the committee announces its rate decision and releases the FOMC Statement at 12:30pm, then Tripple B (Big Ben Bernanke) hosts a press conference at 2:15pm, where he is expected to talk about the recent FOMC Statement and answer questions from onsite media members. What is also expected during today’s meeting is a new quarterly Economic Projections, and here is the release for June 22, 2011:
With current U.S. economy still under considerable pressure, we are likely to see further downward revisions to the June forecasts. With the 3rd quarter GDP showing some optimism, however not enough to affect Fed’s projections, I’d believe to see perhaps new projections between the 2.0 ~ 2.5 for 2011, 2.7 ~ 3.3 for 2012, and perhaps 4.0 to 4.5 (increase) for 2013 as recent easing policy should support growth in the economy. Of course, market will probably act a bit to the risk adverse direction and BUY USD.
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
I’d expected this paragraph to remain largely unchanged. We may see some upgrade in the language, perhaps mentioning some positive signs in the housing sector, and some optimism in the household spendings… But at the end of the day, market should not be surprised here.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
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At this moment, I’d expect to see minimal change in this paragraph. But I’d be looking at the phrase ”Significant Downside Risks” to perhaps upgraded to just “Downside Risks”. If this change is made in today’s FOMC Statement, I’d expect a surge in Risk Appetite sentiment and see market sell off the USD.
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 extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
We’ll probably see some updates in the language regarding to the “Operation Twist”. However, it is going to be highly unlikely for the Fed to change the $400 Billion amount or the timeframe (June 2012). Therefore, we’ll probably see very little reaction from the market to these paragraphs. If FOMC decides to release an update, then it will be somewhat unexpected, so we’ll have to examine the words to get a better idea. Of course, any changes or updates to these paragraphs should not affect the market much unless Operation Twist itself is being changed.
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