FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank
of Tokyo Mitsubishi UFJ highlights that Usd is down this morning
following a more dovish than expected FOMC meeting yesterday.
With the Fed adding $45bln per month of Treasury purchases to make
up for the end of Operation Twist, its balance sheet has expanded
to $85bln a month. The Fed also left the door open to adjusting the
pace of QE purchases ahead which could either be raised or lowered
depending on the performance of the US economy. Hardman still
anticipates that open-ended QE will continue at least until the end
of 2013.
He feels that the Fed´s surprise announcement came from its
decision to replace its calendar commitment to low rates with
economic thresholds in line with its dual mandate. The new guidance
states that rates will remain low at 0.00-0.25% as long as the
unemployment rate remains above 6.5%, inflation between 1-2 years
ahead is projected to be now more than 0.5% above the committees
long term 2% goal and longer term inflation expectations continue
to be well anchored.
However, Hardman believes that the Fed gave itself some leeway to
deviate from specific goals, stating that they will "consider other
information, including additional measures of labour conditions,
indicators of inflation expectations and readings on financial
developments"
The Fed clarified that their new rates commitment is consistent
with their old calendar rates guidance, still signalling that rates
are likely to remain low until mid 2015 while inflation is expected
to remain below 2.5% throughout the forecast period. As a result
the impact of the new rate guidance upon market expectations should
prove modest given that it was already discounting the first rate
hike in late 2015.
Also, Hardman notes that for the first time the Fed states that
when it begins to tighten policy, it will do so in a balanced way,
suggesting that rate hikes are likely to proceed at a moderate
pace.
Hardman finishes by writing, "Linking rate expectations more
closely to the unemployment rate will make the US dollar even more
sensitive to US labour developments. The Fed has consistently
underestimated the pace of the decline in the unemployment rate in
recent years as such it is not necessarily a more dovish policy
development if the US economy recovers more strongly than expected
prompting earlier tightening than late 2015."