rahul.khanna's picture

What to make of FOMC policy statement?

US economic data has been relatively decent and we see FED stopping its bond purchases, bringing an end to its QE program. Fed will still have a balance sheet of $4.48 trillion going forward and that will keep yields low than they would otherwise be.

Policy makers are likely to express concern on inflation and danger it poses on economic performance. Hence, Fed is likely to keep the language saying target rate to stay near zero for a “considerable time” and “significant underutilization” in labour market.  

Fed main concern would be slowing global economy and its consequences on US economic growth. However, China’s growth numbers are not that worse as it could have been and Fed may just look the other way for the time being, expecting China to provide its own stimulus. On the other hand, Fisher and Plosser have already expressed concern on low rates leading to instability in financial markets and statements from number of Fed governors since last meeting hinted that first rate rise expectation around middle of next year seems reasonable.  

On the dovish side: The Dollar will dip as the front end interest rates will dive, while SPX will get a lift. But with Fed focused on core rather than headline inflation and Q3 growth already near 3%, surprising market on the dovish side will take some doing.

On the hawkish side: The Dollar will rise as the front end interest rates will rally, while SPX will fall. Any change in language as mentioned earlier and not mentioning weak global growth will be seen as hawkish, but the latter is unlikely.