March 20, 2014 in Forex Fundamentals and News
The FOMC meeting, chaired for the first time by Janet Yellen, announced the third instalment of a $10 billion cut in its monthly bond purchase program, a part of its quantitative easing agenda for bolstering the US economy.
The monthly bond purchase target now stands at $55 billion, comprising bond purchases of $ 25 billion and Treasury purchases of $ 30 billion.
The FOMC clearly placed recent slowdown in economic numbers at the door of adverse winter weather, at least partly, and was therefore encouraged to continue with the measured reduction in quantitative easing that was indicated in December 2013. At the press conference, Yellen also said that the FOMC expects “sufficient underlying strength in the economy to support ongoing recovery in the labor market.”
On interest rates, the FOMC pledged a continuation of a low rate regime, and delinked them from the hitherto 6.5% unemployment benchmark. The committee said it will now consider “a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” while maintaining a trajectory towards maximum employment and inflation of 2%. Analysts have dubbed the new system as “qualitative guidance.”
However, the markets were comforted by the words, “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.”
Later, at her press conference, Yellen hinted that the Fed could start raising shorter term interest rates within six months of the end of the asset purchase program, causing a sharp jump in bond yields, such as the 10 year UST whose yield jumped to 2.77% from 2.74% before the Fed’s press release. The DJIA hit the day’s low losing 210 points.
Gold was a major casualty of the Fed event – it continued its sell-off as highlighted yesterday and in the chart for today.
The dollar strengthened across the board, as shown in the ellipse on the chart of the dollar index below.