19/Sep/2013 • Currency Updates•
The Fed decided to keep the pace of Treasury and mortgage bonds unchanged for now. This is what we had been expecting, though the market had priced in a modest start of the taper, i.e., cutting back purchases by $5 to $15 billion a month.
More significantly, the statement details were fairly dovish. The FOMC lowered its GDP growth projections (both the central tendency and expected range) for 2014 and 2015. They brought the upper end of the range down by 0.4% Changes to unemployment and inflation projection were minor.
While we expected that the taper would be delayed, the changes to the projections were more dovish than we expected. Also, members expectations for the timing of hikes was pushed backward somewhat.
It appears that the FOMC will not start the “taper” until we get at least one more solid employment report, with drops in the unemployment rate that are not caused by labor force withdrawal. We therefore will be revising our short-term forecast for the USD lower against most currencies this week.