Greenspan leaves the door open for Bernanke

From DailyFX:

"Catching the market by surprise, the Fed released its decision 2 minutes early.  The dollar sold off against the Euro as the statement contained a whiff of dovishness.   In the new and much shorter statement, the Fed dropped the sentence, “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured” and replaced it with “The Committee judges that some further measured policy firming is likely to be needed.” According to the Fed, core inflation still remains relatively low, but they will continue to watch economic data and the trend in energy prices to make sure inflation does not tick higher once again. 

We think the key really is the words “likely to be needed,” because this means is that the Fed is paving the way for a January rate hike, but leaving changes in March a bit more uncertain.  This makes perfect sense since the January meeting will be the last that Greenspan will Chair.  For the one in March, it will be Bernanke’s call and Greenspan wants to make sure that he doesn’t lock Bernanke into any situation where the market has pre-determined expectations.  The new wording gives Bernanke ample flexibility to keep raising rates or leave them unchanged. Ever so diplomatic, Greenspan is clearly paving the way for a smooth and seamless transition and allowing Bernanke to adapt to the changing conditions of the economy.  Given Bernanke’s past dovish statements regarding deflation, the Market may anticipate an easier monetary policy which could turn the market’s psychology against the dollar.  Especially since the dollar’s bullishness has been primarily brought on by the Fed’s relentless rate hikes over the past 18 months.  Meanwhile, retail sales came out softer than expected for the month of November due to a 5.9 percent drop in gasoline receipts.  The Fed has noted that they are watching the trend of economic data very closely and their next move with interest rates will be based upon the trend of future data.  If the economy’s growth continues to slow, they may be tempted to end their tightening cycle sooner rather than later."

Popularity: 2%