Federal Reserve Extends Bond Buying Program, Weakens U.S. Dollar

Includes: UDN, UUP
by: FXstreet

Unsurprisingly, FOMC members announced no change in interest rates for the foreseeable future, while deciding to add to current monetary easing. Ultimately, the amount of easing and the recent addition of economic benchmarks will undoubtedly continue to spell disaster for the world's safe haven currency.

The Verdict

In attempts to support higher labor market employment, and keep longer term interest rates down, the Federal Reserve elected to "keep the target range for the federal funds rate at 0 to 0.25 percent", with the current range of interest rates being seen as widely "appropriate".

The measure was further reinforced by the announcement that central bankers were adding to current monetary stimulus, as the bank's Operation Twist, which was extended since June 2012, will come to end in the next couple weeks. To this end, and adhering to market expectations, the central bank will commit to purchasing $45 billion in Treasuries a month. The measure will run simultaneously to already previous commitments of $40 billion in mortgage bonds per month made this September.

The new purchases are expected to inflate the current Federal Reserve balance sheet by $1.1 trillion, supportive of a $4 trillion debt load for the monetary body.

What's New

However, in a surprise announcement, policymakers noted the addition of a benchmark when it came to future monetary policy decisions. Central bankers will now be specifically tying monetary policy decisions to target rates in both inflation and unemployment.

Specifically, rates will be kept at exceptionally low levels "at least as long as the unemployment rate remains above 6.5%" and "inflation between one and two years ahead is projected to be no more than half percentage point" above the FOMC's 2% target - or simply above 2.5%.

Seemingly, this move was made in an effort to become more transparent with markets, allowing for hard evidence of a recovery to surface before any type of monetary policy adjustment is to be made.

Overall Take

Wednesday's decision shouldn't really come as a surprise to investors, as expectations were high that the Fed would ultimately side with more stimulus as the economy hasn't really improved since their last meeting. However, today's release does show a Federal Reserve that is coming to the end of its rope of monetary options. This will likely weigh on the U.S. dollar in the coming sessions, adding to already established speculation of further greenback debasement.

Technical Snapshot

The announcement has allowed the EURUSD to vault higher through 1.3050 resistance, en route towards 1.3100. A subsequent break above the 1.3100 would open scope for an advance on the 1.3171 September 17th swing high. Any near term correction would be held at bay by the 1.3052 short term fib support.

(Click to enlarge)

Source: FXTrek Intellicharts

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.