Key Points of June 18th FOMC Meeting

Key Points of the June 18th FOMC release, paraphrased:


 

"Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow... Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable."

"...The Committee expects that ... economic activity will expand at a moderate pace and labor market conditions will continue to improve."

Paraphrased: The combination of midlly improved labor data, rising household spending, rising business fixed investment, a slowing housing market and low inflation is all within an acceptable range for the FOMC economic forecasts. Low inflation is the key as they can continue asset purchases and ZIRP (zero-interest rate policy) as long as inflation expectations don't shoot up.

"...the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month."

Paraphrased: $10 billion taper, as expected.

"...asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well."

Paraphrased: $10 billion taper is continued expectation, but if labor market gets worse or deflation occurs then asset purchased could increase or taper could stall.

"...highly accommodative stance of monetary policy remains appropriate. In determining ... federal funds rate, the Committee will ... take into account ... labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee ... will ... maintain the ... federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored."

Paraphrased: If inflation expectations increase then we may see higher interest rate, otherwise this is it for the long-haul.


To sum it up: As long as inflation remains low and unemployment remains elevated, the Fed sees much more benefit in ZIRP and asset purchasing than the risk of doing nothing, which is generally USD weak and a better performing economy with a higher central bank interest rate should outperform the USD. If inflation expectations increase (they are forecasting 1-2% for the next few years)


 

Key economic events to watch going forward:

- U.S. inflation (CPI) - lower inflation or deflation would stall taper or increase asset purchases, push out interest rate increase and be USD negative. Higher inflation data would be USD positive as it increases the chance of a asset purchase decrease and an interest rate rise.

- U.S. employment/unemployment/labor force participation figures - negative misses mean taper could stall, pushing out interest rate increase, and would be USD fundamentally negative. Positive misses increase chance of steeper taper or continued taper, and increase likelihood of interest rate increase, which would be USD positive.

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