Vital U.S. Market Readings on Previous Fed Policy Announcement Days

September 23, 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 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4764 91.44 3.46 9806 69.24

 

Today is Fed Day.  Following a two-day meeting, the Federal Open Market Committee will announce its latest decisions on interest rates and quantitative easing and will release a statement about its latest thinking on economic conditions and prospects, with some guidance on future policy plans and the factors upon which such are likely to be based.  Only eight FOMC meetings are scheduled each year.  This is the sixth.  The table above compares levels of the dollar, 10-year Treasury yields, the DOW, and oil prices now to readings taken at the time of prior Fed announcement.  These statements are released around 14:15 local time and 18:15 GMT in today’s case.

The federal funds rate has been kept in a zero to 0.25% target range since December 16th.  The statements from March 18, April 29, June 24, and August 12 each predicted continuing “exceptionally low levels of the federal funds rate for an extended period of time.”  That language almost certainly will not change today.  Quantitative easing continues, with Treasury purchases scheduled to phase out at end-October and buying of mortgage-backed securities and agency debt to run through the end of the year.

Although new policy initiatives have not been launched recently, the above table highlights the ongoing swing toward easier monetary conditions. Over the six weeks since the August meeting, the dollar has depreciated over 3.5% against the euro and about 5% relative to the yen, the ten-year note yield has shed a quarter of a percentage point, U.S. stocks have recovered between 4.5% (DJIA
) and 6.5% (S&P 500), and oil costs have eased 2%.  Since March 18, the dollar, which is practically never mentioned by the FOMC but monitored closely by the central bank’s critics, has lost 11.2% against the euro and 6.8% against the yen.  The DOW has soared 33.6% since March 18th.   A daring move, which I do not anticipate in today’s statement, would be to identify recent dollar depreciation as a possible medium-term risk factor on inflation.  The last two FOMC statements used the same language to describe inflation, predicting that it “will remain subdued for some time.”  And that’s how today’s communique is likely to leave matters.

Analysts agree that the FOMC’s assignment at this juncture involves a balancing act to acknowledge that the economy is transitioning into recovery — Bernanke has said more than once that the recession is likely over — but to reassure investors that it will be later, not sooner, when officials begin raising interest rates and mopping up excess liquidity.  Knowing that markets have a hard time differentiating the medium term from the present, officials must decide how much new contingent information about the exit strategy can be conveyed without rocking the boat now.  Investors would like to know when such will begin, how quickly rates might be raised, and details about the interplay of quantitative tightening and rate raising.  FOMC statements are probably not the best vehicles for spooning out such information.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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