This week’s big event that has the forex market’s focus is the Federal Open Market Committee’s (FOMC) rate decision and statement, economic projections, and Federal Reserve Chair Janet Yellen’s subsequent press conference. The federal funds rate is not expected to change at 0.25%, but market watchers will be scouring the statement looking for changes in the language, particularly the possible exclusion of the word “patient.”
Webster’s New World College Dictionary defines the adjective “patient” as an ability “to wait calmly for something desired.” On that score, the Fed has certainly been patient with the near-zero interest rate policy it established in early 2009. But is its patience starting to wear thin in the face of a strengthening American economy and a rocketing greenback? That’s what every investor under the sun wants to know when the FOMC statement is published at 2 p.m. ET on Wednesday, followed by Yellen’s press conference at 2:30 p.m. ET.
And yet the omission of that one word, should it come to pass, may not be as straightforward as some may think. Yellen has mentioned time and time again that altering the language in the Fed’s statement does not necessarily translate to a rate hike in the near term. Market watchers and participants aren’t likely to buy in to that train of thought but the situation is the central bank’s own creation. For instance, the market has seen the change from “considerable time” to “patience” and will therefore read it as a sign of an upcoming change in monetary policy. The strong U.S. dollar has begun to affect earnings forecasts from American companies, and even though the U.S. employment recovery has been announced, there are some inconsistencies that have raised doubts about its sustainability.
A Sea of Change Is Expected
Yellen has continued on the course set by her predecessor, Ben Bernanke, by moving away from using firm dates on which to base monetary policy decisions and opting instead for them to be data dependent. This gives the central bank more flexibility at the cost of transparency. Given the macroeconomic headwinds both domestic and international, U.S. economic health would be different even from meeting to meeting, thereby making its forecast difficult. In order to release an appropriate decision the Fed has gone back on its previous forward guidance and refined its definition of economic health for the U.S. economy.
The mixed data going into the FOMC pow-wow features a strong nonfarm payrolls number, but weak U.S. retail sales, and it has divided opinions. The summer rate-hike proponents highlight the need for a hike sooner rather than later based on the employment recovery and the pace of the growth of the economy. Fall rate-hike supporters are more concerned with weak consumer spending. Jobs have returned, but the wages have not kept up with the growth, hinting at lower disposable incomes. Lower energy prices are putting more money in consumers’ pockets, but they are opting not to spend. The comments from the Fed about international developments validated the patience it has exhibited so far. Macro headwinds continue to threaten the U.S. recovery in the form of lower demand for U.S. goods as the American dollar appreciates.
Embattled Euro Could Get a Lift
The EUR/USD started this week strong and erased the losses from last Friday. It has broken through the 1.06 level and threatened to rise higher only to come back to the 1.06 line where it currently trades. Depending on the final statement from the FOMC, and Yellen’s comments at the press conference, the USD could turn the tables on the EUR and continue its rally. The presence of the word “patient” could boost the EUR and help the currency regain some of the ground lost after the announcement and launch of the eurozone’s quantitative easing program.
This FOMC meeting presents an ideal opportunity for the Fed to change its language, but reinforce a “soft” patience is required, as per Yellen’s answers to financial press questions on the topic recently. After the end of a more transparent forward guidance period, the market has been brought back to pre-crisis levels of trying to interpret the obtuse statements from central banks that seem committed to remain noncommittal.
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