Fed Instant Reaction: Almost, but Not Quite, Entirely As Expected

The Federal Reserve’s October monetary policy statement just hit the wires, and traders generally got what they were expecting from the world’s largest central bank. As widely anticipated, the Fed stuck to its foreshadowed timeline by tapering the final $15B in monthly asset purchase; at this point, continuing the quantitative easing program would likely have caused more harm (in terms of lost credibility and increased uncertainty) than good.

Despite the decision to wind down QE, the FOMC clearly emphasized that any rate hikes were a long way off. In what’s become a bizarre game of chicken with the market, the central bank left its “considerable time [until interest rate rises]” pledge in the statement. Meanwhile, Minneapolis Fed President Kocherlakota was the only dissenter to the statement, arguing that the Fed "should commit to keeping the current target range for (fed funds)" until 1-2 year inflation outlook returns to 2%.

In a seeming contradiction to some of the more dovish comments though, the statement was also more upbeat in its economic assessment. One passages in particular stood out: “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.” This is a meaningful upgrade to the previous statement, and it flies in the face of some traders’ fears of a potential global slowdown. On the whole, the statement was slightly less dovish than expected, and the US Dollar has rallied as a result.

Reading between the lines, this month’s statement suggests that the Fed has shifted its focus from a balanced look at unemployment and inflation to an almost-exclusive hyper focus on inflation. Moving forward, the regular CPI and PCE releases may start to take on more significance for traders, as the gradually improving employment situation is no longer a meaningful obstacle to normalizing policy.

The market reaction to the statement has been modest, though we are seeing a slight move toward strength in the US Dollar and weakness in global equities. With USDJPY breaking above key previous resistance at 108.20, a continuation toward 109 or even 110.00 is favored in time, as we outlined earlier today.