Monetary policy again expanded by the Fed yet again.

Fiscal Cliff

U.S. politicians continue to be entrenched in their positions regarding the fiscal cliff.

The talks between U.S. president and House of Representatives speaker, republican John Boehner continued during the weekend, but there had been no progress regarding how to resolve the crisis.


In line with investors’ expectations, the Fed announced that instead of purchasing $45 billion through the “Operation twist” program, it will purchase government bonds in the same volume.

This program is in addition to the QE3 program launched in September, in which the Fed purchases mortgage-backed securities at a pace of $40 billion per month.

All together, the Fed’s balance sheet is expected to increase by a trillion dollars by 2013.

We note that the QE3 and QE4 programs have no deadline, as their length and extent are directly dependent on the performance of the labor market and inflation.

The Fed announced:
“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability”.

We note that the Fed’s additional expanding of monetary policy did not surprise market participants, see the decline in gold prices and the Treasury yield increase after the announcement.

Zero interest rate policy in the U.S.

The Fed has updated the future path of the zero interest rate policy, when it dropped its statement that the interest rate is expected to remain at its current level until mid-2015 and noted that the interest rate path now depends on economic data such as unemployment and inflation.

We emphasize that according to the Fed’s expectations, the new goals are consistent with the previous forecast (zero interest rates until mid-2015).

Economic data released last week were mixed

Negatively, we note the sharp and lateral decline in real exports in October (-4.8%) and the sharp decline in real imports (-3.7%).

On the other hand, retail sales (excluding vehicles and fuels) rose in November by 0.7%, though expectations were +0.4%.

In addition, U.S. industrial production jumped by 1.1% in November (-0.7% in October.) It is likely that both parameters were significantly affected by damage remediation after hurricane Sandy.

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