Forex Analysis (Tue December 14 2010, 2:15pm NY Time EST) - US FOMC Rate Decision

Henry Liu

Former FPA Special Consultant
FOMC will be releasing its Federal Funds Rate today and it is widely expected that Bernanke et al will keep rates unchanged at the current level, 0.25%, while keeping QE2 at the 600 Billion target unchanged.

Even though some speculators may suspect a very small chance of an increase in the QE2 program as stated by Bernanke in his interview recorded on November 30, in which he said that the Feds will increase the 600 Billion QE2 target if the situation warrants it, but remember this was recorded before the disappointing NFP release on December 3, while the FOMC was under fire for going ahead with the QE2 when every economic indicator (with the exception of NFP on Dec. 3) was better than expected.

Bernanke would probably dial back a little if the interview was done after the NFP release, because by then there were no more questions or concerns about the state of U.S. economic recovery, or the necessity of QE2.

Furthermore, to support the "unchanged" scenario on the QE2 target, we are only in the first month of an eight-months operation, it is simply too soon for the Feds to make any changes or commitments when the economy could very well change for the better, or worse, in the next 3 to 6 months. If one thing that we are sure of, is that Bernanke will be very cautious in his decision to increase stimulus, as further increase without evidence of the job's market recovery could result in sharp decline in the USD.

Therefore, I'd expect the same old rhetoric from FOMC today. There may be some bearish statements on recent employment figures, but economic indicators such as Retail Sales, GDP, and the steady rise in inflation should cancel out the negative effect. Market should remain unchanged provided that there are no surprises in the FOMC statement itself.

Since the "likely to warrant exceptionally low levels of the federal funds rate for an extended period" phrase is always a strong focus, if there is a change to this phrase and the words "extended period" are removed, we should expect strong demand for the USD as speculators take this as signs of possible rate hike in the near future.

However, the most likely scenario is for unchanged verdict on the Federal Funds Rate and QE2, with FOMC statement staying almost identical to the last release, adding some minor changes that may or may not address recent NFP disappointment.

All in all I would recommend to stay out of the market. The only possible trade is if the "extended period" phrase is removed, and we would be buying USD immediately.

Historical Chart & Data for US FOMC Rate Decision


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