U.S. Vital Signs When the FOMC Met Previously

August 10, 2010

Since the June FOMC statement was released, the dollar has retreated 6.2% against the euro and 4.5% against the yen.  Ten-year Treasury yields have declined another 30 basis points to 92 bps below their level when the Federal Open Market Committee met in late April.  The Dow Jones Industrial Index is 2.8% higher than its level on June 23 but 4.1% below its level at the April meeting.

Monetary officials at 14:15 EDT (18:15 GMT) will announce another downgrade in U.S. economic conditions and prospects.  The June statement had said the recovery is proceeding, which was a downgrade from the late-April observation that activity “has continued to strengthen.”  In June, consumption was said to be “increasing,” investment in equipment was “increasing significantly,” but non-residential investment was called “weak.”   Housing starts were downgraded to “depressed.”  The labor market is no longer “improving” as officials felt in June.  One area that looks better than in June involves financial conditions.

Analyst opinion is less united over whether the FOMC takes any action now to stimulate monetary policy.  The bias last spring had been toward restraint, but Bernanke opened that door toward a possible easing during his Humphrey-Hawkins testimony by mentioning three possible avenues: a) officials could indicate that tightening will not begin until later than thought previously, b) the rate banks earn on deposit reserves at the Fed could be cut, or c) taking steps to prevent the balance sheet from falling, lengthen its maturity, or even increase asset holdings.  Chairman Bernanke had indicated such actions were not needed in the near term, and his testimony was only three weeks ago.  Thus, a change now would suggest a recent departure in central bank thinking.

The dollar reacts not to direct shifts in U.S. economic prospects or to implications for Fed policy but rather to how such information affects investor risk aversion.  Thus, even though the April 28 statement trumpeted the ending of quantitative easing, the dollar fell in immediate response because of a lessening risk aversion.  Today has already brought some news that lifted risk aversion from China. 

The last monetary tightening cycle began in mid-2004.  Over 17 straight FOMC meetings, the Fed funds rate was lifted by 25 basis points each time, reaching a peak of 5.25% from June 29, 2006 until a 50-bp reduction announced on September 18, 2007.  Compared to levels at the time of that first easing almost three years ago, the dollar advanced 6.0% against the euro but plunged by 25.6% against the yen.  The DOW is 21.4% weaker now than then, and and ten-year Treasury yields are 168 basis points softer.  Oil prices are ironically near their September 2007 level.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3099 86.08 2.83 10593 79.60

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

Tags:

ShareThis

Comments are closed.

css.php