June FOMC statement removes downside risks and opens the door to tapering QE in 2013

Today’s FOMC statement produced no major changes to monetary policy:

Maintains $85B a month pace of purchasing Treasuries & Mortgage Backed Securities
Kept rates at 0-0.25% as long as the unemployment rate remains above 6.5% and 1-2 year projected inflation remains below 2.5%

Two key proclamations within the statement:

Downside risks to the labor market & economy have diminished since the fall – Hint towards tapering?
Inflation is running below the FOMC’s longer-run objective partly due to “transitory influences”

Interestingly, for the first time in years there was not one but two dissenters, as James Bullard stated the FOMC should “defend its inflation goal in light of recent low inflation readings” – dovish, while Esther George maintained her hawkish stance.

June summary of economic projections for 2013 saw decreases to their growth, inflation & unemployment outlooks (from March):

GDP: 2.3 to 2.6 from 2.3 to 2.8
Unemployment Rate: 7.2 to 7.3 from 7.3 to 7.5
PCE Inflation: 0.8 to 1.2 from 1.3 to 1.7
Core PCE Inflation: 1.2 to 1.3 from 1.5 to 1.6

Huge market response since the announcement:

USD has rallied significantly versus the majors – between 75-150 pips across the board
US equities are lower – DJIA -160 points
Treasuries have sold off – 10 year yield is 11bps higher

In his press conference, Bernanke stated “it may be appropriate to moderate the pace of purchases later this year” assuming that the incoming data remains consistent with Fed forecasts – Those forecasts imply that QE could come to an end by the middle of 2014. He also reinforced that the FOMC expects a “considerable period of time” between the end of asset purchased and the beginning of rate hikes.

Source: Forex.com

19.06.2013