15 July 2014

Fed underwhelms: dollar dips, stocks rise

US stocks continue to rally as FOMC shows no sign of raising rates just yet No great hawkish surprises from the Federal Reserve this week as minutes from the central bank’s June policy meeting offered little fresh impetus to markets.
​​usd-ipad_auto_tn_300.pngNo great hawkish surprises from the Federal Reserve this week as minutes from the central bank’s June policy meeting offered little fresh impetus to markets.
 

There was no real indication about when rates would increase, though the June 2015 Fed Funds futures was trading a little higher as the minutes were digested later on.​​​​​

What did come out of the minutes was a broad consensus among policymakers to end stimulus in October, though there was some debate about whether the final taper would come in a single $15 billion reduction or in a $10 billion reduction followed by a $5 billion reduction at the following meeting.

“While the current asset purchase program is not on a preset course, participants generally agreed that if the economy evolved as they anticipated, the program would likely be completed later this year," the minutes read.

Despite the woeful first quarter GDP figures, the Fed seems united in its opinion that the US economy is strengthening.

John Hardy, Head of FX Strategy at Saxo, says the overall impression of the minutes was dovish, though the implications of this should be limited for now.

He does note that there was some concern expressed on financial stability, though markets seemed to shrug this off.

"Favorable financial conditions appeared be supporting economic activity," the minutes said. "However, participants also discussed whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions."

Hardy suggests that the insouciance from the Fed is setting the tone. “Perhaps the lack of a feeling that the FOMC is prepared to do anything besides ‘note their concern’ is the reason that the June 2015 Fed Funds futures is trading a few ticks higher as the minutes were more thoroughly analysed last night."

In terms of market response, the US dollar was broadly lower, as “some thought they might wax more hawkish”, says Hardy. Though he also notes that on the longer-term outlook the dollar recovery is “on schedule”.  The dovish FOMC meeting in June doesn’t affect the rate picture or the taper and supportive data will mean a continued recovery in the dollar, he argues.

Meanwhile, stocks rose as markets viewed policymakers as being in no hurry to increase rates, with the Dow climbing 0.5 per cent.

Fed chair Janet Yellen's testimony before Congress on the state of the economy and monetary policy on Tuesday (July 15th) is the next thing on the calendar.

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