The Fed keeps its printing presses on but will the dollar continue its decline?

pierreapienaar
By pierreapienaar on Thu, Oct 31, 2013 - 10:00am

The news that the Federal Reserve left its policy unchanged during its 2-day meeting on October 29-30, was in line with market expectations.

 

The Fed’s overall assessment is that since September, incoming information “generally suggests that economic activity has continued to expand at a moderate pace”.  In addition, both developments in the labor market as well as on inflation, were seen in a positive manner by the Fed.

 

Something that is a serious drag on the economy is fiscal policy, according to the Fed.  This should serve as a warning both to politicians that are fighting to achieve further spending cuts as well as to those who aim to raise taxes further.

 

This is particularly applicable to the new round of budget negotiations, as additional fiscal restraint could deal another blow to the moderate recovery of the US economy.  One of the surprises of 2013 has been how resilient US economic growth has proved following the sequester-related cuts and tax increases.

 

The absence of any direct reference to the government shutdown in the announcement, could lead to some questioning whether the shutdown was indeed so important – at least in the eyes of the Fed- so as to have any significant monetary policy implications.

 

Back to the Fed statement, the slowing down of the housing recovery was also noted.  Given that almost half of the monthly stimulus (40 billion dollars) goes towards purchases of mortgage-backed assets, this observation could have an impact on how any eventual tapering will be split.

 

Referring to the tightening of financial conditions back in the September statement – a reference that was missing in October’s announcement – was the steep rise in mortgage interest rates, which have since backed down.

 

Although there is sort of a new consensus that tapering is off the table until March 2014, the Fed itself did not give any indications on when it would contemplate a reduction of its asset purchases.  The Fed would continue its asset purchases and to employ its other policy tools “until the outlook for the labor market has improved substantially in a context of price stability”.

 

The following sentence from the statement is particularly important: “Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases”.

 

The Fed will remain data-dependent therefore.

 

To sum up, Quantitative Easing goes on but incoming economic data –particularly on unemployment and inflation – as well as Fed speeches which could throw light on any change in the policy outlook, will be key in coming months.

 

The dollar could continue to sell-off on any fresh signs of economic weaknesses, but for now it appears that yesterday’s news are in the price.

 

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Comments most welcome. Thanks.

 

Have a peaceful, purposeful,  happy and profitable day

 

Pierre A Pienaar

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