Key Market Prices on Previous FOMC Days

September 21, 2010

During the six weeks since the August 10th FOMC meeting, most U.S. economic data ran initially on the weak side of expectations, but the past couple of weeks have seen more upside data surprises such as today’s report on August housing starts.  Officials at the previous meeting decided not to let maturing holdings of agency debt and agency mortgage-backed securities acquired in earlier quantitative easing cause a passive reduction of the Fed’s balance sheet.  Subsequent verbal remarks have indicated that if future economic activity becomes too weak and if higher levels of resource usage are not achieved gradually, fresh stimulus, which market participants have dubbed QE2, will be undertaken. 

Almost nobody expects that to be unveiled today. Besides the more reassuring data reported lately, the congressional election campaign is seen preventing any dramatic new initiatives today.  The next FOMC statement is scheduled for the day after the election.  Hopefully, by then, congressional actions on regulations and taxes may be clearer.  I doubt the Fed would act now even if an election didn’t loom, and if officials were very certain that QE2 would be unavoidable six weeks from now, it’s doubtful even with the election that they would delay the decision until November.  The main reason for delay is the most obvious one:  enough uncertainty exists on the outlook that it is unclear whether more stimulus is in fact required.  The nature of that uncertainty means that a decision to undertake stimulus or not in November remains a contingent one dependent upon what happens to the economy, in politics affecting other policies, and in the marketplace during the coming six weeks.

Compared to August 10, the dollar is hardly changed, and the Dow Jones Industrials index has risen 1.4% on net.  A 14-basis point decline in ten-year Treasury yields and a 7.8% drop in West Texas Intermediate oil prices constitute more significant market movements.  From three years ago when the Fed first eased in response to sub-prime mortgage and broadening financial crisis, the dollar has depreciated 26% against the yen but risen almost 6% against the euro.  Oil prices are 9.5% lower now than then.  The 10-year yield has declined by 184 basis points, and equity prices remain 20% lower on balance.

The Fed funds target was reduced from 5.25% prior to September 18, 2007 to a target range of zero to 0.25% by the December 2008 meeting.  Present rate guidance that the target is likely to stay “at exceptionally low levels for an extended period” was established in March 2009 and hasn’t been modified, although K.C. Fed President has dissented from that language at each meeting this year.  $1.25 trillion of mortgage-backed securities and about $175 billion of agency debt were bought mostly during 2009 in what’s known as QE1.  The August 10, 2010 statement conceded that the “pace of economic recovery is likely to be more modest in the near term than had been anticipated.”  More significantly, that statement added that, “measures of underlying inflation have trended lower in recent quarters.”  To wit, on-year core CPI inflation was only 0.9% in June, July and August, roughly half its desired level.  The fear is that a fresh downward price shock such as from a double-dip recession could depress inflation closer to zero and possibly into deflationary territory.

The table below documents where the dollar, long-term interest rates, equities, and oil prices were at the time when earlier FOMC statements were released.  The Fed funds rate target was raised from 1% to 5.25% between June 2004 and June 2006, then held at that higher level until September 2007.

  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 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3125 85.38 2.67 10751 73.70

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

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