FOMC Wrap: Forecasts more hawkish, but Bernanke dovish

Still quite a diversity of forecasts among FOMC members on policy, though no huge shift. FOMC forecasts were generally revised to the hawkish side for 2012. But Bernanke press conference encouraged the doves.

FOMC Forecasts
The economic forecasts from Fed officials weren’t particularly earth shattering, with most of the changes concentrated on the 2012 numbers, as the unemployment rate forecast for 2012 was lowered to the 7.8 to 8.0% range from 8.2 – 8.5% in January and the inflation rate expectations were pushed higher to 1.9 to 2.0% from 1.4 – 1.8%. The GDP forecast was also nudged slightly higher. The 2013 to 2014 growth forecasts were merely fine-tuned about 0.1% lower on average.

Far more interesting were the forecasts for the policy rate, as five Fed officials among the 17 surveyed expected the rate to be 1.0% in 2013, while 7 thought the rate would be below 1% in 2014 and 11 saw no rate increase before 2014. Still, there was only a net shift of 2 officials into the “appropriate timing” of monetary policy firming into the year 2014 (7 now believe this), while 3 still expect a move in 2012 (!), 3 in 2013, 4 in 2014 and none in 2016 (formerly 2 were forecasting no move until then.)

Bernanke Press Conference
In an early question at the press conference, Bernanke laid out the loud and clear that the Fed is “prepared to do more” if conditions warrant – no big surprise there, and this saw the bond sell-off from the forecasts unwinding quickly and the USD uptick turning into a USD downtick. His general message remains one of “let’s wait and see” and that the economy is not out of the woods yet.

One of the more pointed remarks made by Bernanke was his (implicit?) ruling out of so-called “Nominal GDP targeting” as encouraged by Evans speeches in recent months as he stated, somewhat tangentially to the subject, that it would be “reckless” to pursue higher inflation in order to lower the unemployment rate. That is about as hawkish as it gets in the Bernanke department – but the market took little note of this.

Late in the press conference, Bernanke mentioned a personal hypothesis that the next few month might see slow job gains.

Conclusion
There wasn’t a whole lot to go on from this meeting and it looks like it is up to market sentiment to decide whether this was the QE3 hint that we’ve been waiting for. The gold and bond markets are voting rather clearly on the dovish side, while the equity market had already rallied ahead of today’s FOMC main event and the reaction there is tougher to judge.

My conclusion is that nothing much has really changed from this meeting and I still think we’ll have to see “blood on the trading floor”, i.e., severe economic and market strain before we have the next helicopter drop of easing, and that the political events of the fall are an interesting twist in this situation. If the market wants to sell the USD here after today’s meeting, I suspect it won’t last for more than a week or so. A natural focal point higher for EURUSD in this event would be the 200-day moving average at just below 1.3500.

Stay tuned and be careful out there.

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I write regularly about FX and FX strategy for TradingFloor.com.  You can see all my stories on the John J. Hardy page.  If you become a member of TradingFloor.com – it’s free! – you can comment on my stories and choose to be notified by email whenever I have a new story or update.