Dollar Rallies to New High Following Upbeat Fed Announcement
The U.S. Dollar rallied to a new high for the year after the
FOMC announcement offered an upbeat assessment of the economy.
While just about everyone knew the Fed would keep interest
rates unchanged at near 0% for a prolonged period of time, traders did take
note of the change in its language when it said āthe pace of economic activity
is likely to be moderate for a timeā. This was better news than the statement
in December which read āeconomic activity is likely to remain weak for a
timeā.Traders responded to this good
news by sending the Dollar to its highest level since September 2009.
The Dollar also strengthened on the news that the Fed would
end its mortgage buyback program as scheduled on March 31st. This news drove up
short-term interest rates as traders assessed this action to mean the economy
was improving enough to warrant a rate increase sometime after September. The
FOMC did cover itself against future deterioration in the economy by saying
that it āwill continue to evaluate its purchases of securities in light of the
evolving economic outlookā.
There was one dissenter present at the meeting. Kansas City
Fed President Thomas Hoenig objected to the language of keeping interest rates
low for a prolonged period of time. He may have felt the time was right for the
Fed to own up to the improving economy rather than keep the market in suspense.
What his dissention does reveal is that there may be regions or pockets in the
economy recovering faster than others. Traders should watch for more commentary
from Mr. Hoenig when the Fed Presidents hit the speaker circuit in the next few
The Fed also indicated that credit markets were improving
when it announced the closure of four facilities supporting money markets and
bond dealers. In addition, dollar swap programs initiated in 2009 were also
tagged for closure.
While some may view these moves as aggressive, it still
shows the Fed remains content with taking baby steps as it removes the training
wheels from the economy. Concerns about employment and inflation still remain
the major hurdles the Fed has yet to overcome.
In its statement, the Fed said, āInflation is likely to be
subdued for some timeā and āinformation received since the Federal Open Market
Committee met in December suggests that economic activity has continued to
strengthen and that the deterioration in the labor market is abatingā.This means that the emphasis the next few
months will be on the employment picture. The Fed will want to see a stronger
trend developing in the jobs market before it can accept the fact that
sustainable growth is taking place. By the time the Fed meets again on March
16th, it will have two Non-Farm Payroll Reports under its belt when it re-evaluates
the employment situation.This should
give the Fed plenty of ammunition to make a more powerful statement should
improvements in the economy warrant such a move.
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