FOMC Sticks to Script: Balance Sheet Unwind to Begin “Relatively Soon” and USD Retreats

by
Marc Chandler
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Introduction by
George Dorgan
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Summary:

 

Little new in FOMC statement.

Seems consistent with a Sept announcement to begin reducing the balance sheet in Oct.

USD sold off as if reflecting sentiment held in bay until the statement was out of the way.

The FOMC statement reads very much like the June statement. There were some minor tweaks in the first paragraph that discusses the broad economic performance since the last FOMC statement. There was little change in the assessment of inflation, which was a keen interest to investors. As in June, the Fed recognized that inflation was running below the 2% target and that it would be watched closely.

While there were limited changes in the statement, but most of the changes appeared in the paragraph that discussed the balance sheet. The Fed seemed to bring forward from June the guidance as it to prepare the market more for a September announcement.

Specifically, it began the paragraph with a conditional “For the time being” it will maintain its current practices of reinvesting principal payments. It indicated it would begin the normalization program “relatively soon,” which is what Yellen said at the press conference after the June meeting. This is consistent with a September announcement for a October commencement of not reinvesting the maturing proceeds in full.

With little new information in the FOMC statement and no surprises, the passing of the meeting allowed the market to do what it was doing before the calm around the FOMC meeting. This is push US rates and the dollar a bit lower. Sterling is posting an outside day and a close above yesterday’s high (~$1.3085) would likely signal a move toward last week’s high near $1.3125 at least. The euro rebounded from a test on $1.1615 to retest yesterday’s high (~$1.1710). The pullback in US rates dragged the dollar lower against the yen. The greenback had been near session highs (~JPY112.20) before the FOMC statement.  It was sold below JPY111.50.

USD/JPY - US Dollar Japanese Yen, July 27-28 (see more posts on USD/JPY, ) - Click to enlarge

About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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