With many observers expecting the Fed to taper in September, disappointment that there was nothing in the statement to support such ideas has seen the dollar fall and the stocks and bonds trading higher.
The main change in the statement appears to be greater recognition of the risk of deflation. This essentially co-opted Bullard, who did not dissent dovishly as he did in June. George continued with her hawkish dissent. The Fed's assessment of the economy was tweaked, recognizing that mortgage rates have increased and fiscal policy is still offering restraint to the economy. Measured inflation was below the Fed's long-term expectations, but it noted again that expectations remain stable.
The Fed sticks with its forecast that the economy will strengthen, though it continues to recognize downside risks. Next month when the Fed provides new economic forecasts, it will likely have to walk back from its optimism.
The long-term asset purchases remain data dependent. Some Fed officials have suggested that the data that is important is not simply the latest prints of high frequency reports, but the cumulative effect of the data. Clearly, the economy is not as fragile as it was in late 2012. On the other hand, the increased saliency of the low inflation in the Fed's thinking is also critical, not just growth and employment.
The ECB and BOE meet tomorrow and both are expected to reiterate a dovish forward guidance. After rallying to almost $1.3340, the euro has come back off. This reflects a broader dollar recovery. As we suggested earlier today, we suspect after retreating since July 9, the dollar has found a near-term bottom. Sterling, which often leads the way, peaked last Thursday.