US FOMC Interest Rate decision today is the main focus of the week, and with the Fed close to the end of the tapering cycle (only $25B remain), any surprise today will have the potential to drive USD further, although most analysts are expecting a stronger USD as Feds move closer to rate normalization (hike).
2:00pm US FOMC Interest Rate Forecast 0.25% Previous 0.25%
DEVIATION: N/A
Let’s take a look at the prior changes for last FOMC Statement as our basis for today’s FOMC Statement.
*BOLD INDICATES CHANGES.
July 30 - FOMC Statement Analysis
Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources [tweaked from The unemployment rate, though lower, remains elevated]. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable [revised from Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.]
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat [revised from: Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term].
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month. The Committee 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 and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals [new dissent].
With the Feds continuing with the measured additional $10B of tapering per meeting and the fact that there could be no dissenter this time (hopefully Plosser would reach an agreement in this week’s FOMC Meeting), I would expect to see USD ultimately gaining after this release today… Of course, if USD were to weaken, the long-term trend still remains unchanged in my opinion… Here are few scenarios to consider:
- No Additional Tapering - Market should sell off on the USD, we should go LONG on GBPUSD or EURUSD immediately as USD should remain under pressure.
- Additional $10B (total $15B of monthly purchases) - Market could BUY USD, but because this is expected, market actions could be limited. I would stay on the USD side for longer-term trades…
- Additional $20B (total $5B of monthly purchase) - This would be a VERY positive surprise for the USD as no one expects this size of addition. I will go ahead and SELL EURUSD, BUY USDJPY.
Market should also be paying close attention to the projections. At this time most FOMC officials expect a rate hike by mid to late 2016. If that consensus were to change, we should see strong market reaction… Additionally, FOMC Chairwoman Yellen will be holding a Press Conference at 2:30pm, a live webcast is available here.