Three Major Changes in the Fed's (Longer) Statement

The Federal Reserve cut interest rates by 25bp to 2 percent, which was right in line with the market’s expectations. However, the U.S. dollar sold off because the market was disappointed that the central bank did not give them more. This appears to be a classic "buy the rumor, sell the news" type of reaction in the greenback, since the statement was undoubtedly more hawkish than the one released in March.

I noticed 3 major changes in the statement:

1) Two members voted to keep interest rates unchanged. Although Plosser and Fisher dissented last month as well by favoring a smaller rate cut than the 75bp of easing delivered on March 18th, they could soon convince some of their peers to follow suit.

2) The Fed took out their promise to act in a “timely manner” and instead, they simply said that they will act as needed. The statement about the downside risks to growth is also gone and even though we do not believe that the downside risks to growth have really disappeared, taking these words out of the statement is symbolic.

3) The Fed reminded the markets that they have eased interest rates substantially (325bp since August) and over time, their efforts should have an impact on the US economy.

For all intents and purposes, the Federal Reserve is telling the markets that the economy needs time to absorb their rate cuts and their toned down statement suggests that they will not be cutting interest rates again in June.

The futures market is currently pricing in a 78 percent chance that interest rates will remain unchanged at the next Fed meeting and a 73 percent chance that interest rates will still be at 2 percent in August.

Yet the U.S. dollar sold off because the market is not confident in the Fed’s judgment. This morning’s Chicago PMI report and GDP reports were better than expected, but non-farm payrolls on Friday should be weak. So far, the central bank’s rate cuts have only had a limited impact on the US economy.

It takes time before the monetary stimulus can be felt, but if it does not come through soon, an accelerated deterioration in the US economy could force the Federal Reserve to pick up where they left off.

Although I still believe in a short term dollar bounce, I think the dollar is still headed lower over the next few months. As Antonio Sousa, one my Currency Analysts at DailyFX pointed out, the FOMC statements have become longer and longer in recent meetings and the central bank’s increasing need to explain themselves can be worrisome for dollar bulls.

April Statement: 305 Words
March Statement: 288 Words
January Statement: 250 words

Comments

[benisanidiot]

What do you think Helicopter Ben is:
(1) an idiot who likes his steak tartare medium
(2) has no backbone and is subservient to other interests
(3) the devil incarnate who is out to destroy the U.S. and the world

[sivere]

I think it is time to TakeBackTheFed.com

[uncool]

I suspect Ben has more intellect than most people reading this. If you want to think he is an idiot who likes his tartar medium(which by the way is the funniest line I have read in while), you are welcome to. however, if you want to enhance your finances, you may wish to come up with a different(perhaps more accurate) model for trying to figure out what he might do next. I just don't think an idiot could have the job. He may do what some think are idiotic, but others think it is brilliant.

[flow5]

Bernanke is still following (closely) the r-o-c's in gdp. He will stop cutting because the proxy for the rate-of-change in nominal-gdp & probably real gdp have both turned around, and have now resumed some growth.

None of this however, has anything to do with the U.S. dollar. The current account deficit is inexorably forcing the dollar down in terms of its foreign exchange value—and no consortium of central bankers, treasury secretaries, et al. can stop the process.

[Bill W.]

Kathy, just saw your clip on Fox New's.........how could you say that inlation in the US is only 4% with a straight face!

[Tomas Birriel]

inflation isn't an opinion. it is (around, i'll give you that at least) 4%

[sbenard]

Why is it that all the governments around the world that peg their currencies to the Dollar have inflation in the 7-11% range, but yet the U.S. government persists in suggesting that inflation is in the 2-4% range? Our government has a fox-in-the-henhouse motive to intentionally understate inflation. That way, Congress can continue its spendthrift ways at lower cost and they can undercompensate seniors on the Social Security cost of living increases. Under the older, simpler, more accurate method of calculating inflation, it is in the range of 7-10%, not the doctored rate they report. When the government persists in such attempted deception, their credibility is destroyed. Everyone who has bought just about anything over the past six months knows better!