The US Central Bank left interest rates unchanged at the record low 0.25%. The tone of the FOMC meeting oozed showed slight signs of optimism with growth forecasts improving modestly. Greater confidence in the labour market combined with tensions easing in the financial market allowed for a less dovish outlook for the US economy. Further Quantitative Easing measures were not mentioned and this boosted the US Dollar as inflationary concerns were put on hold.
The US Dollar also benefitted from a positive report from the Federal Reserve that detailed how 15 out of 19 of the country’s largest banking institutions are considerably better prepared for economic downturn now, than they were in the financial crisis of 2008. The Fed’s ‘stress tests’ showed that the large majority of banks were sufficiently funded to survive another severe recession. It shows that regulator pushes towards fortress-like balance sheets for banks have been successful. This not only reflects well on the US economy in fiscal terms, psychologically it also boosts investor confidence in the reserve currency US Dollar as a safe haven.
However, some financial institutions have taken a less rosy approach to the Fed’s announcement. Society Generale predict further asset purchases in the form of QE3 in April. They perceive that a depressed housing market, elevated unemployment levels, and a constant risk of inflation, are still lurking behind the optimistic tone of the Fed’s statement:
“The immediate market reaction to the FOMC was muted, suggesting that the market has expected nothing less from the Fed. The Fed does not appear to be in the position to take any option off the table at this critical juncture of the economic recovery. Earlier in the day, retail sales figures surprised on the upside, pushing stocks higher. And yet, the US economy needs to be nurtured by the Fed to gain traction. The Fed is now expected by most market participants to err on the side of being too accommodative. Fix the economy now, worry about inflation later. This confirms in our view that QE3 is coming.”
Society Generale’s forecast appears to be one of the minorities within the market. Stocks and indices rallied worldwide yesterday amongst a 0.23% gain for the US Dollar ticker. Some are calling for the Fed to release its hold on interest rates before 2014 to allow the Dollar to grow. But although the Fed’s dovish stance appears to be fading, their hold on the marketplace does not.