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No Action from the FED, results in weaker USD

Wow! The Fed surprised the financial markets last night when they decided not to taper (The word tapering in financial terms is increasingly being used to refer to the anticipated reduction of the Federal Reserve’s quantitative easing, or bond buying programme). Although in the run up to this event many professional forecasters were lowering there expectations for a $5 billion reduction, versus $20 billion just a couple of weeks ago the market was still clearly expecting action from the Fed last night.

So why didn’t they taper? The justification for no action came in the form of the Fed’s assessment of the domestic US economy and that they wanted to see further evidence of a sustained economic recovery before fine-tuning the pace of purchases which currently stands at $45 billion US Government bonds and $40 billion Mortgage Backed Securities per month. Another reason for the in-action was down to the aggressive rise in interest rates in the US i.e. the increase in yield in US Government Bonds for instance. The initial 2H13 US Growth numbers the markets have received to date have not pleased them and we saw the Fed reduce their growth forecasts for 2013 & 2014.

What was the market reaction?

The USD falls to a 6 month low against GBP at 1.6146
Source: Bloomberg

The USD falls to a 6 month low against EUR at 1.3545
Source: Bloomberg

The S&P 500 Index of US Equities hit an all time record high
Source: Bloomberg

US 10 year Government Bond yield retreats from 6m high of 2.99% on 05-Sept-13 back to 2.69% overnight
Source: Bloomberg

What should we be looking for next?

The next 3 month maybe very similar to the past 3 months, with the future of Fed tapering becoming even more data dependent. If the labour market data (i.e. the US un-employment rate & Non- Farm payrolls number) continue to show improvement, a taper beginning later in the year may still be possible but we would need to see a mark improvement in the economic data similar to that of the UK of late.

The next key events to monitor; October 1, Yellen speaks at the Economic Club of New York; October 4, US payroll data; October 9, minutes from today’s FOMC meeting. These events should see a lively start to October!

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