I'm not one to exaggerate things, but this has got to be one of the wildest market environments I've ever seen in my LIFE! One minute, risk would be on, and the very next, off! One minute, the yen would be rallying to new all-time highs, and in the blink of an eye, it's down over 300 pips due to a Bank of Japan (BOJ) intervention. To say that the markets have been crazy as of late would be a huge understatement.
Just take a look at price action on the dollar yesterday. Following the Fed's much-awaited statement, it sold off faster than you can say "Not again!" The dollar lost massive pips against all its major counterparts, losing against comdolls and safe haven currencies alike. Its drop against the Swiss franc made it look like a divine intervention was in the works as USD/CHF lost over 200 pips within a span of just 30 minutes!
Of course, we all know that the Federal Open Market Committee (FOMC) statement was responsible for yesterday's ruckus. But what exactly did the FOMC say to stir the markets up?
Well, nothing good, unfortunately. Although the Fed did note that there were a few bright spots in the economy, such as business investment in equipment and software, it had to man up and admit that the economy's recovery is "considerably slower" than expected. In my opinion, that's just a fancy way of saying "We're up to our necks in doo-doo!"
The economy is obviously not gaining any steam. It can even be said that it's actually growing weaker. Slumps persist in the consumer and housing sectors, and the labor market situation doesn't seem to be getting any better. Apparently, the most recent NFP report didn't impress Big Ben and his crew either.
The FOMC believes that the economy will remain frail for at least two more years. On top of that, it seems convinced that inflationary pressures in the country have moderated. In fact, the statement cites that it won't be long until inflation meets the Fed's target of 2%. Heck, it may even fall below that level in the next few quarters.
With that said, the FOMC has pledged to keep interest rates at near-zero levels until mid-2013. The committee also said that will continue to reinvest principal payments from its maturing security holdings to spur economic growth.
In a surprising turn of events, we saw that three members dissented from the committee's vote. Just so you know, we've haven't seen anyone oppose the final decision of the FOMC since November 1992!
Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis, and Charles Plosser of Philadelphia seem think that the committee should pay more attention to the risks of inflation. Based on their previous statements, they seem be on the defensive against further easing.
Too bad for dollar bulls, the hawks were outnumbered. The rest of the FOMC clique think that the recent weakness in the economy will last longer than what was previously expected and warrants further support from the Fed.
Consequently, this has sparked rumors about QE3. Although I don't expect the bank to talk about further quantitative easing anytime soon, I wouldn't be surprised to hear talks of QE3 gain steam if we continue seeing more signs of economic weakness from the U.S.
So make sure you keep tabs on economic reports coming out in the next few weeks. Who knows, the sharp dollar sell-off we saw yesterday might not just be a pullback but the beginning of a reversal.