The Federal Reserve’s Minutes from the Open Market Committee were released and quickly disappointed the market. The EUR/USD was on very volatile ground after the minutes were released as participants were digested the minutes. Once the market agreed that there was a not a clear signal in the minutes the EUR appreciated. It is interesting to see the reaction to the minutes given that the main arguments were made two weeks ago when the FOMC issued its statement. The minutes did not add a lot of details other than the fact that the vote was not unanimous.
The Fed noted in the minutes that it is aware of the volatility it can cause with it’s tapering communications. This is an interesting comment given how difficult it has been for the Fed to communicate
Fed Review of the US Economy
The Federal reserve states that the US Economy expanded at a moderate pace in the first half of the year. Private-sector employment improved in June. Unemployment rate is still high. Inflation slowed down in the second quarter. Overall the Fed continues to monitor employment above all which is why indicators such as unemployment claims and Non-farm payrolls releases will have major market impact.
The Fed Economic Outlook
GDP growth was weaker on net in the first half of the year than the expected growth. The Staff forecasts a higher growth in the second half. The Fed still believes there will be strong growth in 2014 and 2015 supported by consumer and business confidence increases, additional availability of credit, and an accommodative monetary policy. Inflation is not a main concern, but could pick up in second half.
Participants for the most part agreed with the economic assesment and monetary policy communications. They did have some suggestions on how to improve communication in a succintl and clear manner.
There was an interesting exchange regarding forward guidance and some participants expressed concern on using the unemployment rate as a benchmark could lead the public to believe that the Fed could also affect an upward move and therefore reduce the credibility of the central bank.
All voting members except Esther George voted against the action proposed in July. George wanted a more proactive stance regarding the tapering schedule to not be so open to interpretation. Her suggestion is for a bolder move given the employment recovery and reducing the costs of the asset purchases.
The market focused on the other members who do agree that a wind down of the bond buying program is needed and that the economy is moving in the right direction. But they stopped short of the boldness demanded by Esther George.
Bernanke to miss Jackson Hole
With Jackson Hole coming up and the notable abscence of Ben Bernanke it would be very interesting to see if the Fed starts tapering before there is a new head in place. The succession is still up in the air with leading candidates Larry Summers and Janet Yellen on equal footing although in different circles. Summers is favoured by politicians while Yellen has the economist advantage. This has made Summers the front runner given it will be a politician who appoints him in the form of President Obama.
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