FOMC: Market Reaction

June 24, 2009

The FOMC statement contained no significant surprises.  Officials seem comfortable with how the recession and financial market strains are winding down and predicted subdued inflation “for some time” but without the risk of deflation that had been cited in the previous April 29th statement.  Today’s wording did not clarify the timing for the start of monetary tightening, repeating the expectation of a zero to 0.25% Fed funds target range for an “extended period of time..”  No further quantitative easing commitments were made.

Market reactions to an event, whether such be a piece of new data, a policy move or some geopolitical news, often reveal more useful information than the news itself.  The instant reaction to today’s FOMC statement, that is market changes between 18:10 GMT and 20:30 GMT, was extremely similar to what occurred on April 29th. Comparisons are presented below.

  April 29 June 24
USD versus EUR +0.6% +0.4%
USD versus YEN +0.5% +0.2%
USD versus CAD +0.1% +0.5%
10-year Treasury +8 Basis Points +11 Basis Points
DJIA -0.1% -0.9%
Oil Prices -0.3% -0.2%


Today’s response suggests that the rise of bond yields may be far from capped and that equities could correct further downward.  Both trends could challenge the current optimism in an emerging recovery and underscore the difficulties of steering monetary policy away from an extremely expansionary stance back to more normal settings.  The problems for policymakers will be many, but here are three.

  • Correctly measuring and interpreting the economic tea leaves.
  • Striking the right balance between economic risks such that policy is reversed as quickly as the economy can possibly tolerate.
  • Withstanding political pressures and potential conflicts of interest arising from enhanced Fed responsibilities and powers.

Implications from today’s post-FOMC updrift in the dollar are more difficult to draw because the same reaction after the prior policy meeting was not indicative of how the U.S. currency actually traded over the ensuing two months.  Today’s statement will not erase a level of distrust that the heavy double dose of monetary and fiscal reflation can or will be removed without a legacy of serious long-term problems, and that is not a supportive backdrop for the dollar. 

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



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