FX Closing Note: Fed opens door to QE in November if necessary

The FOMC statement leaned slightly more to the dovish side then we were expecting as it basically opened the door to a move to expand the balance sheet at the November meeting without fully committing to do so. How much of that is priced into the market?

The FOMC statement leaned a bit more toward a commitment to do something if needed than we expected and can be seen as a "set-up" meeting to a possible move in November if conditions warrant, but there was nothing at all specific about what the Fed might do - and to get that discussion we'll need to wait three weeks for the minutes of the meeting. The knee-jerk reaction was of course for dollar weakening as the bond market exploded higher and risk assets basked in the glory of an imminent gravy train of further liquidity. Sarcasm intended…

Some comparisons with last statement

On economic activity: virtually unchanged for the first sentences, but slightly downgraded business' capital spending as being "rising less rapidly than earlier this year". The description of bank lending was nudge slightly higher, described as contracting "less than earlier this year".
Our comment: these changes extremely minor and cancel each other out.

On inflation: The new statement now describes underlying inflation as "at levels somewhat below those the Committee judges most consistent, over the long run, with its mandate to promote maximum employment and price stability." This was compared with the previous description of inflation simply "likely to remain stable for some time:

Our comment: a very pointed statement and strong signal of dissatisfaction - note that "stable" was removed here but kept in the next paragraph in Fed's assumption about the outlook - a bit confusing.

On Fed's policy now: no real change

On Fed's outlook: The addition that the Fed "is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."
Our comment: This is the door opener to a future move and the second mention of inflation suggests a strong warning that the Fed will not tolerate lower inflation. So going forward, the inflation-related releases (Prices Paid figures for ISM's, too) are going to have an extra weight for the coming couple of months ahead of the next meeting on November 3.

Market reaction: with the tremendous rise in risk appetite and USD weakness leading into this meeting, one would have thought that a fair amount of dovishness was priced in. But the first half hour of market action in the wake of the statement suggests that this is not the case, though of course we'd like to see where the markets settle by the end of the day and even the end of the week. Note that EURUSD (as of this writing trading at around 1.3250) has swooped above its 200-day moving average. The next big level is the 1.3335 top from early August. The AUDUSD, no real surprise is much higher, though AUD is underperforming the Euro - an interesting state of affairs, to say the least.

USDJPY is toying with 85.00 again and one can't help but wonder if Japan will be out blasting the market with USD buying/JPY selling in Asian hours.

Stay careful out there.

Link to full text of September 21 FOMC statement
Link to full text of previous August 10 FOMC statement