Markets Favor U.S. Dollar in Wake of Fed Meeting
New York (June 23) Markets were quieter just after the Federal Reserve's meeting, as market participants paused in order to filter the undertone of the U.S. policymakers' decisions. The question is how stocks and the economy will respond as the marketplace adjusts to comments from the meeting.
Even though Fed Chair Janet Yellen's comments on June 18 appeared to express cautiousness, the central bank's actions point to the opposite direction, as another chunk of the quantitative easing program was trimmed.
The markets initially reacted in favor of the U.S. dollar, and at the same time stocks fell. But that attitude was swiftly changed once Yellen began her press conference and talked down increasing inflation as "noise." She also reiterated the Fed's stance that interest rates would remain low for some time.
Wednesday's Fed meeting included no surprises, as the bank trimmed a further $10 billion off its monthly asset purchasing program from $45 to $35 per month. The ongoing tapering pattern is a projection to the markets of the Fed's belief that the U.S. economy is on its way to recovery in terms of unemployment and long term investments.
Although consumer price index data released last Tuesday were encouraging, the policymakers reiterated their opinion that inflation is lower than their overall target, and they are waiting for the upcoming personal consumption expenditures data for the first quarter of this year, expected for release on June 25, for further information. The Fed lowered significantly its GDP projections for this year from 2.9% to 2.2%, but left GDP projections for 2015 and 2016 unchanged.
Positive economic data were released the day following the Fed policy meeting, about continuing jobless claims. Released by the U.S. Labor Department, the report for the week ended June 6 revealed that the number decreased by 54,000 to a total of 2,561,000. There was also a decrease of the initial jobless claims for the week ended June 13, to 312,000 from 318,000 for the previous week.
These recent labor data are another sign that the world's largest economy is moving toward recovery after the global financial crisis. However, according to the Fed, there is still a long way to go before reaching the desired targets.
Furthermore, the Philadelphia Fed manufacturing index for May continued with its upward trend recorded so far for 2014 and reached 17.8, compared to 15.4 for the previous month. This surprised the markets that expected a decrease to 14. That's an additional indication of economic recovery, as it looks as if the manufacturing sector is expanding to meet increasing demand.
The Fed's meeting and policy decisions have now been long digested, and the U.S. dollar's reaction has been mixed. A short time after the Fed's meeting, the dollar showed signs of increase. But once Yellen had her press conference, the dollar pared all of its initial gains and decreased against the euro. During last week's final trading day, the greenback showed further signs of strengthening against most of its major peers.
It could be that the dollar is moving back to its true levels following two days of losses against the euro, but it could also imply that market participants are slowly digesting that the Fed is taking calculated but forward steps toward putting an end to its quantitative easing program. Will U.S. policymakers raise interest rates before the end of 2014?