Fed has more flexibility after last week’s statement

- "Last week, NBER officially declared the end of the US recession in June 2009. Ironically, it was the same week in which the Fed said that it’s prepared to take additional action if needed (p.2, p.3 & p.4)."
- "This week’s focus is on the US ISM manufacturing index on Friday, on the euro zone CPI estimate on Thursday, and on the UK manufacturing PMI on Friday (p.2, p.3 & p.4)."
- "The Chart of the Week shows the Federal Reserve’s and Bank of Japan’s total assets outstanding as a percentage of nominal GDP. Last week’s FOMC statement showed that the Fed is ready to act if needed. The possibility that the Fed will purchase additional Treasuries in the coming months has therefore clearly increased. Indeed, it feels as if these ‘unconventional’ monetary policy measures are getting almost conventional given that the Fed already engaged in quantitative easing in 2008. The chart shows that the Fed acted aggressively as financial markets were in a deep shock that year. The chart also shows that while the BoJ has acted far less aggressive over the last few years, the total assets/nominal GDP ratio is still well-above that of the Fed. Over the last few months, the Fed slowly moved towards last week’s message that they are “prepared to provide additional accommodation”. Financial markets likely interpreted this as if additional quantitative easing will be coming (soon). Consequently, the USD depreciated last week to 1.35 against the euro. In addition, the downward trend of the USD on a trade-weighted basis that started in 2002 seems to be still intact. That said, although it remains uncertain whether the Fed (if they act) will be as aggressive as in 2008, additional QE could result in a further drop of the USD."

NIBC Markets Roundup 20100927

No comments:

Post a Comment