Tuesday, 11 October 2011

FED MINUTES - FOMC Minutes - 11-10-2011


TODAY'S FED MINUTES - WILL THIS BRING ABOUT ANOTHER MARKET SLUMP?
The long moves over the last week were triggered entirely by the optimism of Europeans who hope that their policymakers would finally get their acts together and deliver on their promises to stabilize the region. Considering how much of the concern of central bankers around the world centers on the uncertainties in Europe, we are not surprised that investors have reacted so positively to the prospect of Germany and France reaching a deal by the end of the month.   Given the large amount of short euro positions in the market, we still attribute much of the move to short covering.  With that in mind however, if Europe truly resolves its problems and the deal sketched out by Germany and France effectively stabilize the market, then a rate cut by the ECB may not be needed, leaving the U.S. dollar a less desired currency because the sluggish pace of U.S. growth could still necessitate more stimulus from the central bank.
Later today the FOMC minutes will shed light on how close the Federal Reserve is to initiating QE3.   The last time the central bank met, they took the rare step of twisting the yield curve by selling short term Treasuries and purchasing longer term ones.  This was exactly what the market had anticipated at the time but meeting expectations was not enough.  The Fed did the minimum of what investors expected and they were punished for it.   Last week, Bernanke stepped out and admitted that that Operation Twist had only a modest impact on the market.   Traders will be looking at the minutes to see how close the central bank was to implementing QE3.   If they discussed it heartily, then the prospect of more stimulus next month is still realistic.   If there was a lot of debate about the need for any stimulus at all and the only reason why they chose Operation Twist was to give the market something instead of nothing, it would be a major disappointment that could lead to a renewed rally in the greenback.   
At the time, there was absolutely no mention of additional asset purchases in the FOMC statement and by not mentioning QE3, it certainly appears that the central bank could be saving their few remaining bullets in case the volatility in the financial markets intensifies or the U.S. economy falls into recession

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