FOMC Statement Shows Policy Makers Downgrading Assessment of Economy

By IBTimes Staff Reporter | June 23 2010 3:10 PM

The FOMC statement showed that Fed policy makers are concerned about developments from abroad, which have tightening financial conditions, which is less supportive of economic growth. Housing continues to be depressed as commercial real estate continues to be weak. Bank lending continues to contract and household spending remains constrained by high unemployment with the labor market improving gradually. Inflation is likely to be subdued for some time.

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The statement therefore downgrades the assessment of the economy compared to the previous meeting and shows that the Fed is likely to keep interest rates low for longer. In the statement they reiterated that rates will stay at exceptionally low levels for an extended period. We did have Thomas Hoenig continue his stance in voting against the extended period language.

The news that the Fed funds rate will continue to stay put helped give US equities a pop and sent risk-on trades higher. The EUR/USD pair recoverd its looses from todya's session and went as far as to test yesterday's highs, while the GBP/USD, supported recently by developments from the UK moved above its resistance at the 1.4935 area.

Another way to look at the moves following the Fed announcement is that instead of recent trends where risk aversion favors the US Dollar, the Fed's downgrade of the economic outlook may be a reason to sell the Dollar. Earlier today the US also had a slightly sluggish 5-year auction of Treasuries which could have put the Dollar at a disadvantage.

Mainly thought the response looks like a bit of risk appetite, as investors expect the environment of cheap money from the Fed to contine, and US stocks shot up following the announcment.