Don’t expect Ben Bernanke to go out with a bang. Tomorrow the outgoing Federal Reserve Chairman will sign off on the last monetary policy statement of his career and with no press conference scheduled, Bernanke will see a quiet end to a long and colorful career as the head of the world’s most powerful central bank. He was the key architect of Quantitative Easing and at the end of last year he laid out a plan for reducing the massive amount of stimulus that he injected into the economy over the past 8 years. It should be a smooth transition for Janet Yellen who has been intimately involved in all of the decisions including the central bank’s most recent decision to begin reducing asset purchases. More than 90% of the 70+ economists surveyed by Bloomberg expect the Fed to reduce asset purchases by another $10 billion this month and judging from today’s rally in the U.S. dollar and rise in U.S. 10 year yields, many investors share their views. However there has been a lot of unevenness in U.S. data since the last FOMC meeting and the turmoil in emerging markets have made life more difficult for many central banks including the Fed. Just because the market expects a $10 billion taper doesn’t mean that tomorrow’s announcement will be nonevent for the dollar. Quite the contrary because investors will be looking for answers to 3 key questions:

1. Will the Fed Taper? – Of course the first question is whether or not the Fed will taper at all. If they reduce asset purchases by $10 billion, it would be mildly positive for the dollar. If they keep asset purchases unchanged, expect a nasty sell-off in the greenback.

2. Was the Decision Unanimous? – The next question is whether the decision is unanimous. If everyone member of the FOMC agreed that another round of tapering was necessarily, we can expect a more significant rally in the greenback. However the greater the number of dissenters, the weaker the rally for the dollar and the higher the chance of a reversal.

3. Changes to Economic Outlook or Forward Guidance? – While we expect Bernanke to leave the decision about changing forward guidance to Janet Yellen, we will be combing through the monetary policy statement to look for any changes to the central bank’s outlook for the economy and monetary policy given the recent deterioration in data. Will they feel that slower payroll growth justifies a longer period of low rates or will they look beyond the number and reassure investors that the economy is still recovering. The answer to this question will play a big role in how the dollar trades post FMOC.

As shown in the following table, although non-farm payrolls growth slowed to 74k from 241k in December, there has been improvement as well as deterioration since the last FOMC meeting. In the labor market alone, the unemployment rate dropped closer to the central bank’s 6.5% threshold and even though advance retail sales growth slowed, core retail sales growth accelerated to 0.7% from 0.2%. Consumer confidence has been mixed, manufacturing and service sector activity slowed but inflation is stabilizing and ticking higher on an annualized basis. Overall the US economy continues to improve and the decision to begin tapering last month was carefully calculated. This is why everyone expects the Fed to overlook last month’s softer economic reports and forge forward with tapering.

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