Wednesday, June 22, 2011

US FOMC Federal Funds Rate Decision - 22 June 2011

 

US FOMC Federal Funds Rate Decision - 22 June 2011

While the market isn’t expecting any changes in today FOMC Federal Funds Rate decision, the accompanied Statement and the Press Conferece at 2:15pm are potentially trend changers. With QE2 scheduled to end this month, Bernanke will be facing the difficult task of addressing the market as to where the Feds stand on future monetary policy, inflation target, economic growth, and 

Here’s what most analysts predict:

2011 GDP: 2.6% (Apr. Projection 3.1%)
2011 Unemployment Rate: 8.4% (Apr. Projection 8.4% & 8.7% by year end)
2011 PCE Inflation 2.1% (Apr. Projection 2.1% to 2.8%)
2011 Core PCE Inflation 1.2% (Apr. Projection 1.3% to 1.6%)

Source: http://www.federalreserve.gov/moneta…bl20110427.pdf

Therefore, Bernanke is going to hit the market with a 1-2 punch where on one hand, he’ll officially announce the ending of QE2, and on the other hand, he would acknowledge that the U.S. economy has hit a “soft patch” (it’s a new keyword now to “soften” recent string of weaker than expectated economic data).

Some blames will be thrown at recent weather patterns, disasters overseas that interrupted manufacturing, and of course the higher cost in commodity prices…

And the famous “…warrant exceptionally low levels for the federal funds rate for an extended period.” phrase is likely to be once again in the FOMC Statement, signaling that the Feds will probably not change its monetary policy for at least 6 months…

Therefore, here are some of the possibilities to watch out for:

1. Bernanke fails to end QE2 or announces an extension for QE2: ACTION – SELL USD.
2. Bernanke issues higher than expected Growth, Inflation, and (lower) Unemployment Rate Targets: ACTION – BUY USD.
3. FOMC Statement removes the “extended period” clause: ACTION – BUY USD.

Of course, depending on Bernanke’s tone and his degree of acknowledgement of the recent “soft patch” in U.S. economy, we could see market reacting to that… but assuming that Bernanke stays neutral and on point (which is what he does all the time), then markeat will focus on the projections…

If you have never traded FOMC Statements before, I’d recommend just to sit in and watch how the market moves… It’s alway better to be safe than sorry.

Thanks, Henry Liu