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Research Note: June FOMC Meeting Expectations
Jacob Oubina, Currency Strategist
(June 23, 2009) The Fed is scheduled to release its press statement on Wednesday at 1415 ET/1815 GMT. That rates will remain unchanged at the 0.00% to 0.25% range is baked in the cake and thus all of the attention will once again be on the press statement. The economic outlook is likely to remain gloomy but the Fed will probably reiterate that "the pace of contraction appears to be somewhat slower". Much has been made as to whether the Fed will announce how long they expect to leave rates on hold - much like the Bank of Canada announced that they are not moving until 2Q 2010 at the earliest. We think the likelihood of this is slim.
There would be little upside to this sort of move and if anything it would create credibility issues if the Fed were forced to move before their stated deadline. It is more likely that they will adopt a message similar to the prior statement when the group said that they expect "exceptionally low levels of the federal funds rate for an extended period". They are also unlikely to expand the $300 billion program to buy Treasuries. This is because the Fed's effort thus far has been futile. Indeed since the purchases started, interest rates have actually moved higher. In sum, barring any major surprise the meeting and accompanying communiqué will probably elicit little in the way of price action.
The biggest risks and the likely catalysts for some serious volatility would be an overall negative assessment on growth or that the committee will say outright how long rates are likely to remain on hold. With an equity market seemingly on knife-edge, any poor commentary with regards to the economic outlook could see risk assets retrench further - the market looks overly optimistic that the Fed will deliver a rosier outlook. If recent price action is prescient, we would expect the USD would be better bid under this scenario. Indeed the negative correlation between the buck and stocks has actually strengthened this month relative to last.
If the Fed announces that they are on hold until a specific deadline well into the future (call it mid-2010), the USD could suffer as US bond yields would likely plunge, sending the currently dollar-supportive interest rate differential lower. The US currently holds a 20 basis point advantage over the Eurozone 10-year yield equivalent. We think the probability of the former event happening (the Fed offering a somber economic assessment) is the more likely of the two and thus would anticipate an overall USD-positive reaction.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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