The long-awaited results of the September Federal Reserve policy meeting will be revealed today, when Chairman Ben Bernanke reveals whether or not another round of quantitative easing will be delivered. With expectations high and the US Dollar at its lowest level since April, today is a pivotal day for markets.
Majors Consolidate as Fate of US Dollar in Balance with FOMC Today
The US Dollar is broadly mixed to start Thursday, in what could perhaps be its last stand against a recent onslaught across the board. Following four out of five very disappointing labor market readings as measured by Nonfarm Payrolls (April: +68.0K; May: +87.0K; June: +45.0K; July: +141.0K; August: +96.0K) and US growth barely moving higher at an annualized rate of +1.7%, expectations are running high for another round of quantitative easing out of the Federal Reserve.
At the Jackson Hole Economic Policy Symposium, Chairman Ben Bernanke outlined an argument that was sufficient enough to “conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation,” though he was careful to note that “[policymakers] are less certain about the magnitudes and persistence of those effects than we are about those of more-traditional policies.” Expanding on this, Chairman Bernanke said that “one possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets…a second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time.”
Overall, the Federal Reserve chairman concluded that “it seems clear…that such [nontraditional] policies can be effective…taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a strong economic recovery and sustained improvement in labor market conditions in a context of price stability.” Thus, the Federal Reserve is primed to act, willing to act, but is not sure that what has been used in the past will be as effective going forward. As such, any new forms of easing, in our opinion, are likely to be cut from a different cloth than previously deployed LSAPs or MEPs, likely aimed at helping consumers and home owners more directly.
Taking a look at credit, peripheral European bond yields are back up (marginally), weighing on the Euro’s bullish technical bias. The Italian 2-year note yield has increased to 2.210% (+8.7-bps) while the Spanish 2-year note yield has increased to 2.748% (+7.0-bps). Similarly, the Italian 10-year note yield has increased to 5.019% (+1.1-bps) while the Spanish 10-year note yield has increased to 5.633% (+7.9-bps); higher yields imply lower prices.
Christopher Vecchio, Currency Analyst
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