Yellen’s First FOMC Does Away With Employment Gauge Boosts USD

The Federal Reserve statement after its Federal Open Market Committee has moved away from using the 6.5% unemployment rate gauge to start hiking rates to a more qualitative range of data. This move was highly expected by the market after former chair Bernanke had questioned the reliance on a single indicator for monetary policy. Janet Yellen was quick to remove the pressure of acting on an indicator that did not offer a complete view of employment.

The unemployment rate takes into account all the people who are still looking for jobs, so if they stop looking they are taken out of the equation. This has the potential to show a stronger employment recovery in theory that what is actually happening in the streets.

To avoid triggering a rate hike that could cut short the slow economic recovery the Fed has pledged low interest rates for longer. The tapering will continue at the $10 billion dollar pace set by her predecessor Bernanke. The size of the stimulus now stands at $55 billion of assets and bond purchases.

The USD was boosted across the board versus major pairs. It broke the 1.39 barrier as Yellen’s actions were expected but her rhetoric pointed to a possible rate hike next fall.

The USD/JPY moved above the 101 level after the Fed chair started her first press conference. Yellen said that the weather was a factor impairing growth, but it’s not the only factor. The strong USD is postiive news for the Bank of Japan that has been pressured to increase its stimulus program if the currency remained at the 101 level. Prime Minister Abe’s plant to increase inflation by employing a 3 point strategy relies heavily on the Bank of Japan.

The USD/CAD went above 1.1250 after the FOMC release and chair Yellen’s comments to the press. A new Finance Minister was appointed earlier today. Joe Oliver replaces Jim Flaherty after the later stepped down from public service. Oliver’s first approach with the press will not receive much impact as it was sharing airtime with Janet Yellen’s first press event as chair of the Fed. Oliver said that he wants a Canadian balanced budget by 2015 and toed the conservative party line.

The Pound went below 1.65 on the FOMC’s statement. This week has been heavy with central bank activity. The minutes in Australia kickstarted a week where the FOMC is so far the biggest mover. The Bank of England shook things up internally. Appointing two new deputies in a move designed to distance the Old Lady from the sins of the past. It is no surprise that PMC Fisher was the biggest loser as he oversaw some of the people involved in the FX probe.

A positive day for the Federal Reserve on Janet Yellen’s first FOMC was not without controversy. The Federal Reserve Bank of Minneapolis Narayana Kocherlakota voted against the change in forward guidance. He says that the new guidance fosters uncertainty. Part of the hawkish minority Kocherlakota will continue to dissent on monetary policy as Yellen extends a more dovish messaging.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza