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FOMC: Balance sheet reductions to commence in October, interest rates unmodified for now

 
 

All eyes on the Fed. 

We derive today's main forex news release from the decision of the two-day Federal Open Market Committee (FOMC) meeting in the United States. 

The key takeaway from the meeting concerns rollbacks of the central bank's $4.5 trillion bond balance sheet adopted to save the economy after the most-recent global financial crisis. It was just announced that the central bank will start reducing the massive stimulus programme in October 2017. 

Regarding monetary policy, Fed Chair Janet Yellen and her colleagues have agreed to leave interest rates steady at 1.25% for now, a decision in line with analyst projections ahead of the meeting. Out of three planned rate increases in 2017, the Fed has so far executed two hikes (in March and June respectively). It was just made public that the Fed policymakers could carry out one additional hike before 2018, however, the highly anticipated Dot Plot showed that some FOMC members have shifted position on the pace of future rate hikes. Studying the Dot Plot, two previously hawkish members have become more dovish on the issue recently. 

Of relevance to all forex traders out there, the US dollar just managed to reverse its early Wednesday dip largely caused by FOMC decision expectations and Donald Trump's protectionist address to the UN Security Council concerning the North Korea conflict. The dollar index, measuring the greenback against leading currency rivals, is now up 0.4% despite the increasingly dovish tone by the FOMC members. The euro dropped 0.5% versus the USD and the dollar strengthened 0.4% compared to the Japanese yen, achieving an eight-week high. Sterling weakened slightly this evening, however, the pound appreciated 0.4% versus the dollar earlier today following data on UK retail sales coming in better-than-forecast. 

Traders now wonder how aggressively the Fed will be able to unwind the stimulus, known as quantitative easing (QE). Mrs. Yellen has previously stated that reductions run best "quietly in the background." In general, there is great uncertainty regarding QE rollbacks worldwide, as the balance sheet initiatives adopted after the financial crisis are of a size and caliber never witnessed before.

More clues on the future of monetary policy could come later tonight as Mrs. Yellen will take questions from the media during the official FOMC press conference.  

The ultimate Fed meeting and press conference this year will occur a few weeks before Christmas, during the FOMC meeting scheduled for December 12-13.