Dollar Tanks but Fed Hits it Big with Open Ended QE

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The Federal Reserve and helicopter Ben came out of the gate swinging with both an open-ended Quantitative Easing program and guidance on the economy. With a commitment to buy $40 billion worth of mortgage-backed securities on a monthly basis with no expiration date, there’s no going back as the floodgates are officially open. When combined with the continuation of Operation Twist to the end of the year, this amounts of a total of $85 billion in purchases by the Federal Reserve for the next 4 months. On top of this, the Fed also extended its low rates pledge from late 2014 to mid 2015 and warned that they wouldn’t hesitate to employ additional tools or expand asset purchases if the labor market does not improve substantially. The central bank sent a very strong message to the market by going above and beyond what everyone had anticipated and that’s what needs to be done if they want to keep the recovery sustained and build up a cushion in growth ahead of the fiscal cliff.

The volatility in the FX market following the Fed’s announcement indicates that currency traders are still trying to digest the implications of the Fed’s decisions. Initially the dollar tanked when investors realized that the program was open ended but the greenback recovered quickly as the critics come out and start doing the math saying that $40B per month is less than the $75B per month under QE2 (but at $85B its not) and openly wondering how much is unlimited really is. While holes can be poked in anything, we believe that today’s announcement represents a major shift in strategy for the Federal Reserve. Bernanke is no longer throwing things out hoping that they will stick. Instead, he pledged to keep on buying until the labor market turns around. Firing up the printing presses and keeping them running with no predetermined termination date is negative for the dollar and when the dust settles we expect the dollar to end the day lower than its pre-FOMC levels.

The Federal Reserve’s monetary policy statement was as dovish as it could possibly get. The Committee explained that, “without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.” They outlined their new bond purchase program, pledged to do more if the labor market doesn’t improve and emphasized that a highly accommodative monetary policy stance would be appropriate “for a considerable time” after the economic recovery strengthens. What the central bank is trying to tell us is that even if the recovery gains momentum, they won’t be racing in to unwind the stimulus until they are certain that the recovery is here to stay.

While currency traders may be confused, the rally in equities and the drop in bond yields confirm that investors are pleased that Bernanke was able to shrug off politics and rev up the printing presses. At the end of the day, this will be bearish for the dollar.

Kathy Lien
Managing Director

One thought on “Dollar Tanks but Fed Hits it Big with Open Ended QE”

  1. it seem that Bern is fond of QE He never reallize that the price of food will picking up due to drough season and oil price will cause the hyper inflation in the near future.idont believe with QE will help the US economic

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