The Federal Reserve has held monetary policy steady as expected. The unanimous decision was to hold the Fed Funds rate at a range of 0% to 0.25% and maintain the asset purchases at current levels of $80bn per month of Treasuries and $40bn per month of mortgage-backed securities (i.e. at a total of $120bn of asset purchases).

The headline decisions come with little surprise, however, markets have moved on some of the re-wording of the FOMC statement.

Here are the changes (courtesy of ZeroHedge). 

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There are two interesting changes here. One is arguably mildly dovish and one is arguably mildly hawkish. It seems as though on the initial moves, traders are focusing on the latter:

  • “The sectors most adversely affected by the pandemic have shown improvement but not fully recovered” – the last bit of that would suggest there is more for the economy to do in its recovery. Arguably a slightly dovish tilt there.
  • “The economy has made progress towards these goals..” (the dual mandate of the Fed is maximum employment and price stability) “…and the committee will continue to assess progress in the coming meetings.” – this is a development along the journey towards the tapering of asset purchases. This is slightly hawkish.

Essentially this gives something for everyone to take out of the statement. However, what we see is the Fed’s position is moving slowly towards tapering asset purchases. If the economic recovery continues as it is, the wording of this statement opens the possibility of using forward guidance in the September meeting to fore-warn of tapering. There are two Non-farm Payrolls reports between now and then. If the labor market data shows continued recovery then the Fed will be pushed ever closer towards tapering. 

Initial Market Reaction

Very early reaction was to take the hawkish line as the one to go with, however, in the subsequent minutes, there has been a degree of retracement. Initial moves higher in yields and a stronger USD have largely unwound. It will be interesting to see if these moves re-establish as the dust settles.

  • EUR/USD -5 pips (was as much as -40 pips initially)
  • 10 year Treasury yield +0.5 basis points (initially added 2 basis points)
  • S&P 500 futures +9 ticks
  • Gold -$1 (initially fell by -$8)

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