What The Fed Decision Means For Currencies
It was a classic case of buy the rumor, sell the news today as the Federal Reserve announced its interest rate decision this afternoon.
As expected, the US central bank decided to implement similar options – dubbed Operation Twist – as their predecessors in 1961. Following a decision of no rate change, monetary policy officials released plans for the purchase of $400 billion in longer dated bonds – in the area of 6 to 30 years. The move is expected to support lower interest rates for the country’s companies and homeowners. But, on the other end, the Federal Reserve elected to sell short term maturities, which includes bonds that are in the 3 year or less range. This point is key. While buying massive amounts of long term bonds, the Federal Reserve essentially will not be creating any more money for the system – which some had anticipated and is dissimilar to quantitative easing programs of the past (specifically QE versions I and II).
This leaves the option for further and outright monetary stimulus, if needed, to be reserved for a rainier day. Federal Reserve officials noted the current and “significant downside risks to the economic outlook, including strains in global financial markets.”
As a result, major currencies trading against the dollar are falling on the news. Not only because the decision was mostly priced in, but some in the market feel that this isn’t enough. Today’s decision does help mortgage holders and companies in the short run. But, it may not be enough to drive economic growth higher. This is especially true following this morning’s announcement that the International Monetary Fund had cut its growth forecasts for the world’s largest economy.
The sentiment has led Euro, British pound and Australian dollar lower among major currencies – and may continue to do so in the coming days. With risk off the table, equity markets are additionally taking the hit, prompting a rush for treasuries. The result are bond yields that haven’t been seen in almost 70 years. The 10-year US treasury yield is currently 1.859%.