Fed sees QE ending in October

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According to June's meeting minutes, released last week, the Fed is expected to end the third round of the quantitative easing in October, should the economy evolve as the Federal Open Market Committee members anticipate. Following a prolonged period in which the Fed has purchased 85 billion Dollars’ worth of assets every month, the Fed's expectation for the end of easing is an historical landmark in U.S. monetary history. With this forward guidance clearly paved, the minutes addressed FOMC members' view of the U.S. and global economy, and the way that translates to future policy.

Among the factors the Fed members' had in mind, it was noted that consumer spending had been supported by household net worth rather than income gains. One plausible explanation would argue that this increase in household net worth is backed by the aforementioned easing, leading to inflating asset prices. On the other side of the equation, the fact that income gains were held back might be the result of this monetary easing not trickling down to the real economy, leading to an increase at the labor markets' demand side. Regarding this, Fed members express a view by which a pickup in income would be the one to support a sustained income in consumer spending. Undoubtedly, welfare effects do not last forever.

Committee members' view of the economy as recovering in some aspects, yet still problematic in others naturally translated to ambiguity regarding the way those members see the federal funds rate, in the future. Among these issues, most participants were said to expect the federal funds rate to remain below their long term objectives at the end of 2016. Half of these participants associated the low level of the federal funds rate with insufficient inflation. Other participants expressed concern of a combination consisting, inter alia, of "lower equilibrium real interest rate, continuing headwinds from the financial crisis and subsequent recession". As Yellen said once, monetary policy is not a panacea. Recently, it also needs to cope with growing resilience by the problems it wishes to solve, as well growing side effect. 

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Temporary maneuvers in a terminal situation

The minutes did note a joint session being held between the Federal Open Market Committee and the Board of Governors where the “eventual normalization of the stance and conduct of monetary policy” was discussed. However, those were said to have been undertaken as part of prudent planning, while stressing that it “did not imply that normalization would necessarily begin sometime soon”. Moreover, the mere idea of "starting to consider the options for normalization at this meeting" was described as prudent, while suggesting the first steps in normalizing policy have yet to become appropriate. At the bottom line, the minutes stressed the fact that no decisions regarding policy normalization were taken, while meeting-participants noted that "it would be helpful to continue to review these issues at upcoming meetings". In conclusion, the Fed managed to assure markets it was attending to the question of when it will increase interest rates, it is simply too early to disperse any information regarding when that will actually happen. It managed to avoid a bullet in the sense that unlike previous comments on the matter, this time no turbulence was witnessed in interest, and subsequently all other, markets, with the release of the minutes. However, the mathematical fact outlined above regarding the imminent end of tapering still holds. The Fed can try using temporary maneuvers in what is essentially a terminal situation, but it will have no alternative rather than changing its strategy at some point. Start Trading HERE!

Economic events of the week

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Monday: The Rightmove House Prices data will shed light on the U.K. real estate sector, amid growing concerns regarding the developing housing price bubble. Tuesday: ZEW Surveys will be published in Germany, revealing financial market experts’ view on the local economy. Wednesday: The Fed and the BoE are releasing their Minutes report. Japanese Trade Balance data will be published, current analyst expectations are for a slight improvement to a -851 billion Yens trade deficit. This will be followed by the Japanese All Industry Activity Index, which analysts predict to slightly improve. U.S. Mortgage Applications data will also be published, after growing mortgage rates set October’s applications to a monthly -1.8% decrease. Advance Retail Sales are due, as well as the Consumer Price Index, which is analyst surveyed to present no monthly change. Unemployment data will be published in Russia, which continued to present a strong economy with only a 5.3% datum last month. Thursday: The day will reveal expectations for future economic recovery for the Eurozone, as Purchasing Managers’ Indices will be published in France, Germany, and the Eurozone’s aggregate. U.S. Jobless claims will make their weekly appearance, and the Bank of Japan will publish its target rate. Friday: GDP data and the IFO surveys will be published in Germany. ECB’s Draghi will speak in Frankfurt and the Eurogroup will hold a meeting. Register at ANYOPTION and start trading TODAY!