Special Report (Forex)

FOMC Review: The Tone Has Turned More Positive

Special Reports |  Written by ActionForex.com |  Dec 16 09 21:04 GMT |

FOMC Review: The Tone Has Turned More Positive The FOMC meeting in December ended almost the same as we had expected. The Fed continued to keep the policy rate at 0-0.25% and pledged 'exceptionally low levels of the federal funds rate' will be maintained 'for an extended period'. The Fed acknowledged recent positive developments in the job market and financial market and said that 'the deterioration in the labor market is abating' while 'the housing sector has shown some signs of improvement over recent months'. Moreover, 'financial market conditions have become more supportive of economic growth'. Concerning the employment condition, the Fed pointed out that the improvement has been driven by lower job reduction, rather than more payroll addition. In the statement accompanying the meeting, the Fed said that household spending remained constrained by a 'weak labor market', compared with 'by ongoing job losses' stated in the previous meeting. Also, the current statement said that businesses remained 'reluctant to add to payrolls', rather than continued 'cutting back on fixed investment and staffing'. There were several special facilities scheduled to expire in 1Q2010. In the meeting, the Fed reaffirmed those facilities including Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility will expire on February 1 2010, consistent with the Fed's announcement made on June 25 2009. Also, amounts provided under the Term Auction Facility will continue to be scaled back in early 2010 and the Fed 'is prepared to modify these plans if necessary to support financial stability and economic growth'. Policymakers decided to leave the Fed funds rate at unprecedentedly low level because the 3 economic conditions- low rates of resource utilization, subdued inflation trends, and stable inflation expectations-persist.

FOMC Preview: Overall Stance Unaltered

Special Reports |  Written by ActionForex.com |  Dec 15 09 16:26 GMT |

FOMC Preview: Overall Stance Unaltered The stronger-than-expected employment report in November triggered speculations that the Fed will hike its policy rate earlier than previously anticipated. This also led to a fight back in the dollar. However, one month's optimistic data is not going to alter policymakers' stance significantly. Therefore, there will likely be minor change in the FOMC statement and Chairman Bernanke will announce to keep the Fed funds rate at 0-0.25% for an extended period of time. Early last week, Bernanke spoke with a cautious tone, at the Economic Club of Washington, about the economic outlook. He said that the economy faces 'formidable headwinds'. He repeated the language used in November's statement: 'Right now we are still looking at the extended period given that conditions remain - low rates of utilization, subdued inflation trends and stable long-term inflation expectations'. At the meeting statement for December, we believe the Fed will acknowledge positive economic development in recent weeks such as noting that the labor market and the financial market has improved. However, it will also stress that the 3 conditions - low rates of utilization, subdued inflation trends and stable long-term inflation expectations- continue to render the rate to stay low for an 'extended period'. Normally, the Fed increases interest rates only after the unemployment has dropped for many months. With current unemployment rate staying at record high of 10%, we do not believe policymakers are comfortable to turn hawkish for the time being. There will be discussions about exit strategy but it will only be mentioned briefly in the statement. While the market anticipate more elaboration on the use of large-scale reverse repos and term deposits to drain reserves, the Fed will probably not give details in the statement so as to avoid speculations that the Fed is already implementing these measures.