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FOMC Monetary Policy: Yellen Sings, Markets Dance

fomc-statement-21.03.2014This week a highly anticipated FOMC Press Conference took place, which was practically the first one for the newly appointed FED Chairman, Janet Yellen. The analysts and the media were expecting some guidance, which would shift from a forward guidance to a qualitative guidance. But first, let’s have a quick recap of the changes that happened with FED monetary policy since the beginning of the tapering.

In December 2013, the Federal Reserve had decided to start trimming the monthly monetary stimulus with 10 billion dollars, making it 75 billion dollars instead of the previous 85 billion. Based on its reaction, the capital markets took the news as a good for them, and the indexes rose after the tapering decision was made public. EURUSD was kind of volatile and directionless, but with an edge towards the appreciation of the US dollar.

January followed and a very tricky mix of data from the US labor market was published. The NFP indicator was very disappointing while the unemployment rate dropped from 7% to 6.7%, very close to the official threshold of 6.5%. However, the tapering continued and another 10 billion were cut, leaving only 65 billion dollars to be “injected” in the markets. Back then, Bernanke calmed the investors saying that the interest rates will remain low even if the unemployment rate would go below the official threshold of 6.5% and blamed the moody weather for the disastrous NFP. The American stock markets fell and the US dollar did not feel good in front of the EUR.


February was also a pretty intense month, as we had another disappointing NFP, the unemployment rate fell further to 6.6% and Janet Yellen was officially named the Chairman of the Federal Reserve. FOMC minutes blamed the disappointing NFP on the weather again, but it was seen as a slight improvement regarding the US labor market even though the NFP was below expectations. EURUSD built some momentum in February and it got closer to 1.3800.

Then, March came by and as expected, the FED reduced the monthly pace of bond purchases by another 10 billion dollars, reducing it to 55 billion. The Press Conference was going towards a standard one, with Janet Yellen mentioning the factors which she will take a look at. She said that the FED will look at a “wide range of information”, including labor market conditions, inflation expectations and financial markets. Also, the FOMC statement repeated that the federal funds rate will stay low for a “considerable amount of time” after asset purchases end. However, the climax of the press conference that made the investors hear only three words from what Yellen said was her answer to how long “considerable amount of time” means? In what was called a rookie mistake, Yellen said: ”You know, this is the kind of term that is hard to define, but, you know, it probably means something on the order of around six months or that type of thing”.

In that moment, three words echoed in the markets, “around six months”. The American stock markets suddenly fell, gold lost ground as well, while the US dollar has gained in value, being the winner of the day and managed to break below 1.3800 EUR. Basically, the FED announced that they plan to raise the interest rates around June 2015, earlier than the previous forecast. These remarks practically shifted the attention from the tapering to the interest rates because now investors can adapt their strategies to the mentioned period in which the rates could be raised. As a conclusion, FED monetary policy is focused on finishing the QE program until the end of the year in a smooth way and to prepare the field for a rate hike towards mid-2015.


FOMC Monetary Policy: Yellen Sings, Markets Dance by