Fed Leaves in Extended Period Language, but Lots of Upgrades

Last updated 3/16/2010 3:04 PM ET (GMT -5) 7 Comments

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Kathy Lien

Director of Currency Research, GFT

The Federal Reserve left interest rates unchanged at 0.25 percent and included the words “extended period” into their FOMC statement.  Going into the Fed meeting, traders were looking for 2 things – the inclusion of “extended period” and the number of dissenters.  Once forex traders saw the words reappear in the statement and saw that Hoenig was the only dissenter, they bailed out of dollars.  However when they took the opportunity to actually read the FOMC statement, they quickly realized that tone was not nearly as dovish as the headlines suggest.  Not only were there a number of upgrades in the language used to describe the U.S. economy, but the Fed will be completing their asset purchase programs this month and shutting down its final special liquidity facility at the end of June.  Although the Fed stopped short of talking about tightening monetary policy, they also failed to mention additional easing.  As long as the U.S. economy continues to recover at its current pace, the Fed will not have to employ additional policy tools to promote the recovery.  Therefore the sell-off in the dollar against the Yen should be limited since the Fed underwhelmed only because they are carefully navigating the waters right now and don’t want to telegraph something they cannot commit to.  The same is true for the dollar’s performance against the European currencies because at the end of the day, the Fed is still closer to tightening monetary policy than the European central banks simply because of the stronger U.S. recovery.  

The Fed now believes that the labor market is stabilizing, which is an upgrade from their prior comment that said the deterioration in the labor market is abating.  The central bank no longer thinks that the labor market is weak and only that unemployment is high.  They were encouraged that business spending has risen significantly but were concerned that housing starts have been flat.  Back in January, they did not mention housing and the return of these concerns following this morning’s weak housing starts number suggests that weather is not only factor hampering housing start - tight credit remains a persistent problem.  

In our FOMC preview, we talked about how the dollar would sell-off against the Yen if “extended period” was included in this month’s monetary policy statement.  This price action is already underway but it should be limited because in the medium term, the Fed is still more hawkish than the BoJ, ECB and BoE.  The Bank of Japan has its own monetary policy meeting this evening and there is a good chance that they could increase Quantitative Easing. 

Today’s Fed statement is not a game changer for the U.S. dollar because at the end of the day, tightening is still the next action that the Fed will take.  

Comparing the FOMC Statements

Comments (7)

Callum

March 16, 2010 at 04:26 PM ET

Excellent analysis.

cr8zysp8des

March 16, 2010 at 06:01 PM ET

thanks Kathy!

GubyIQ

March 16, 2010 at 05:57 PM ET

good job Kathy !

MoneyManager

March 16, 2010 at 06:40 PM ET

Not to mention that the BoJ gets the last vote this week, in about 4 hours or so. ^_^ I traded long, for mean reversion on the selloff, and that's exactly what happened.

rookie

March 16, 2010 at 08:04 PM ET

I think you are exactly right Kathy

aandrew60

March 16, 2010 at 08:59 PM ET

KUDOS KATHY

MHW

March 16, 2010 at 09:07 PM ET

Kathy, it appears that your analysis of the last two FOMC statements
is indeed helpful. Too bad I still don't have the time to read them.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.