Monday, August 8, 2011

Federal Open Market Committee (FOMC) Interest Rate Decision - 9 August 2011

Federal Open Market Committee (FOMC) Interest Rate Decision

While the market isn´t expecting any changes in today FOMC Federal Funds Rate decision, the accompanied Statement and the Press Conference at 2:15pm (NY Time) are potentially trend changers. With S&P’s recent downgrade still affecting the market, Bernanke will have a chance to calm the market today. Understand that even though there are no expectation of QE3, it is widely believed that Bernanke will stick to his “All the Options” are on the table speech, signaling that further easing has not been ruled out…

With recent NFP surprising to the upside and the 0.2% reduction in Unemployment rate, plus both Moody’s and Fitch reaffirming US’s AAA credit rating, the current market sell-off may very well be temporary in my opinion. Although if the equity market drops another 5%, Bernanke will probably have to address it during today’s press conference. And since the Fed’s is in such a difficult position, any mention of the sovereign rating cut may intesify the panic further…

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 ~ 12 months...

Here are some of the possibilities to watch out for:

1. Bernanke metions QE3 or announces the possibility of QE3: ACTION - SELL USD

2. 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 "downgrade" in U.S. sovereign rating, 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 market will probably shift its focus to the next high impact news releases.

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