Vital Market Signs At Previous Meetings of the FOMC

June 24, 2009

  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 1.4034 95.40 3.64 8389 68.82

 

The buzz phrase ahead of today’s FOMC policy statement is exit strategy.  Confidence in a U.S. economic recovery has strengthened since policymakers met late in April, and no additional quantitative monetary stimulus (e.g., the previously announced purchase of up to $300 billion of Treasuries by autumn) is considered likely unless the economy takes a significant turn for the worse.  Market movements such as the 35% rise in oil prices and 62-basis point advance of 10-year Treasury yields since the April meeting and the 4.7% drop of the DOW since June 12th are not deemed sufficiently significant to ease again.  Investors are looking for clues to how policy will be tightened eventually even as they remain very edgy about the task.  There exists a schizophrenic mood on this subject, as substantial risks are perceived with both absorbing liquidity too soon and too fast on the one hand or, alternatively, delaying the onset of tightening for too long and engineering the process too gradually.  Krishna Guba in today’s Financial Times writes about a widening rift among policymakers over inflation risks.  This lack of unanimity bears on the question of whether today’s statement will communicate more precisely just how long the Fed funds target is apt to be kept in a range at  0 to 0.25%.  Some other central banks like the Bank of Canada have pre-announced holding the status quo at least through mid-2010, whereas the FOMC statements from meetings on April 29 and March 18th were vaguer on the matter, merely predicting no likely rate changes “for an extended period.”  I expect today’s statement to hew more closely to those two communiques than to the Canadian approach.

Right after the FOMC announcement on April 29, Treasury yields moved 7 basis points higher, and the dollar rose against both the yen and euro.  Oil prices dipped, and stocks experiences trivial net change in the remainder of that day’s session.  The initial reaction of long-term interest rates correctly foreshadowed the trend over the coming two months, and stocks captured
the ambivalent up-then-down trajectory that occurred subsequently.  The dollar’s uptick, however, was a false signal.  The U.S. currency is now 5.0% weaker against the euro and almost back to the level in September when the FOMC met in the shadow of the Lehman failure.  The dollar has also depreciated 1.7% against the yen.  Critics of the Fed, who prefer an aggressive and early reversal of the ultra-loose policy fault policymakers for not paying more attention to the dollar.  Depreciation indicates that a tighter stance is warranted.

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

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