FOMC Preview

I found just what I was looking for in a preview of the FOMC meeting tomorrow.  Being relatively inexperienced in macroeconomic events and their effects on currencies, I wanted someone to give me a general idea of what to expect tomorrow.  I know that no one knows exactly what will happen but it helps to put everything in context if we know the possibilities.

According to Richard Lee, Currency Analyst at DailyFX, the 2 most likely scenarios are for Bernanke to:

1. raise rates 1/4 point and keep the statement unchanged
2. raise rates 1/4 point and continue bias to raise rate

In the event of #1, the outlook is initially dollar bearish because it keeps the market guessing and is generally what most traders are hoping for.

In the event of #2, this will signal that the Fed is committed to raising rates yet again in August thereby creating a dollar bullish situation.

Scenario #3 is of medium likelihood and is for the Fed to raise rates 1/4 point and shift to a neutral  stance.  This would be bearish for the dollar because the signal here would be that the Fed is done raising rates.

Scenario #4 and #5 are highly unlikely. 

#4 is for Fed to raise rates a 1/2 point and move to a neutral stance.  This would create a mixed reaction because of a higher than expected rate change but a signal that this would be the final rate increase. 

#5 is for the Fed to raise rates a 1/2 point and maintain a hawkish bias.  This is highly unlikely yet good to know in the event that it ever does happen.  This event would obviously be quite bullish for the dollar.

Another thing of interest in this column are his positioning conclusions which could greatly affect my EUR/JPY position which as of now is still open.   He states that if the Fed produces a dollar bullish scenario, the dollar rally would probably be most pronounced versus the NZD, GBP, and JPY.  It would be least pronounced versus the EURO.  If the Fed produces a dollar bearish scenario, the opposite would be true.

Read the complete article 25bp and then what?

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FOMC

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The
Committee sees growth as likely to moderate to a more sustainable pace,
partly reflecting a gradual cooling of the housing market and the
lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities
appears to have had only a modest effect on core inflation, ongoing
productivity gains have helped to hold the growth of unit labor costs
in check, and inflation expectations remain contained. Still, possible
increases in resource utilization, in combination with the elevated
prices of energy and other commodities, have the potential to add to
inflation pressures.

The Committee judges that some further policy firming may yet be
needed to address inflation risks but emphasizes that the extent and
timing of any such firming will depend importantly on the evolution of
the economic outlook as implied by incoming information. In any event,
the Committee will respond to changes in economic prospects as needed
to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack
Guynn; Donald L. Kohn; Randall S.
Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M.
Warsh; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a
25-basis-point increase in the discount rate to 6 percent. In taking
this action, the Board approved the requests submitted by the Boards of
Directors of the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Dallas, and San Francisco.

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