Since the beginning of the week, the U.S. dollar has been trading in a narrow range as investors wait for new direction from the Federal Reserve. The central bank began the long process of unwinding stimulus last year and while Bernanke laid out a plan for tapering, his influence will be limited to one more meeting. This makes it extremely important to understand the motivation and level of enthusiasm for last month's reduction because it will help us determine whether the central bank will stick to his proposal for cutting bond purchases by $10 billion at each subsequent meeting. While the dollar traded higher on the back of stronger trade numbers, the drop in 10 year bond yields suggests that investors believe that under Yellen the central bank could be less aggressive. That's a separate discussion that we will touch on later but more immediately, the focus is on the FOMC minutes and how it could affect the dollar.
Here's what we know about the last monetary policy decision:
- Janet Yellen voter to taper
- Taper nothing more than symbolic - $10B split between Treasuries and MBS
- Fed changes forward guidance - Low rates now appropriate "well past the time that the unemployment rate drops below 6.5%"
- Bernanke believes FOMC will taper QE probably at each meeting, $10B each time with end of QE before 2014 year end
- Fed says tapering will be "in further measured steps at future meetings," determined "deliberately", data dependent
- Bernanke stresses highly accommodative stance, emphasizes that purchases will go on at rapid rate even after taper
- Decision was NOT unanimous - Rosengren voted to keep asset purchases unchanged
- Majority of Fed officials see first rate hike in 2015
- Low inflation is a problem - "more than a bit of a concern." Fed now sees PCE at 1.4%-1.6% in 2014
- Fed tightens up GDP forecasts, sees faster drop in jobless rate, 6.3%-6.6% by end of 2014
If the FOMC minutes show a lot of enthusiasm for tapering with a chorus of central bankers supporting consistent reductions going forward, the dollar should rally taking USD/JPY up to 105 and the EUR/USD below 1.36. However if there are widespread concerns about the high level of unemployment and low inflation with policymakers emphasizing that a predetermined course is inappropriate and future decisions should be data dependent, the dollar will resume its slide driving USD/JPY below 104 and the EUR/USD towards 1.37. Aside from the FOMC minutes, ADP will also release its private payrolls report but this should take a back seat to the notes from the last central bank meeting.
Janet Yellen was confirmed as Fed Chair on Monday making her the first female to lead the world's most influential central bank. Having served as the Vice Chair of the Federal Reserve since 2010, she is not new to the FOMC but her voice will be heard much louder this year in the highly anticipated quarterly post monetary policy meeting press conferences. Yellen is a vocal dove that puts growth ahead of inflation but actions speak louder than words and her vote to taper asset purchases in December suggests that as Fed Chair, she may not be as dovish. Every year, the makeup of the Federal Open Market Committee changes with previous voters rotating out and new voters rotating in. This year's policymakers have the huge responsibility of determining the pace that asset purchases will be tapered and when Quantitative Easing will end.
Two major doves favoring easier versus tighter monetary policy (Evans and Rosengren), one moderate hawk who favors tighter policy (George) and one centrist (Bullard) will be rotating out of voting positions. They will be replaced by Plosser and Fisher, two major hawks, Pianalto a moderate dove and Kocherlakota, who shares a similar bias as Yellen. Former Bank of Israel Governor Stanley Fischer has been nominated to replace Yellen as Vice Chair and if confirmed, another hawk would be added to the roster. This would leave the central bank more hawkish and willing to follow Bernanke's proposal for reducing asset purchases by $10 billion at each subsequent meeting. So while the Federal Reserve will be replacing one dove with another as Fed Chair, on balance the FOMC contains more hawks in 2014, which is bullish for U.S. rates and positive for the dollar. Therefore Yellen's confirmation doesn't make the FOMC as a whole more dovish in 2014.
