US Central Bank Revises US Growth Downward

Yesterday, the FOMC did as expected but some of the most important information and guidance from the Fed seem to have been completely overlooked by the markets. Mr. Bernanke’s new QE4 plan along with the new tie between monetary policy and unemployment and inflation took the markets by storm.

So little attention was paid to other matters.  The Fed’s statement didn’t show many changes in the assessment of the economy and inflation compared with the October statement. Activity and employment were still described as expanding at a moderate pace. Unemployment remains elevated, even if now it was added it had declined somewhat (as evidenced by the most recent payrolls report). The assessment of housing activity was more precisely, the FOMC anticipates that the target range for the Federal funds rate of 0 to 0.25% will be appropriate at least as long as the unemployment rate remains above 6.5%. Inflation between 1 and 2 years ahead is projected to be no more than 0.5%-point above the 2% long-run goal and longer-term inflation expectations continue to be well anchored. The Committee views these 3 thresholds as consistent currently with its earlier date-based guidance.

The alarming change was a downward revision of growth for the US. The new 2013 growth was slightly downgraded from 2.5% to 3% to 2.3% to 3% with similar small downward changes in 2014 and 2015. The unemployment rate forecast was slightly revised lower too for 2013 from 7.6 to 7.9 to 7.4 to 7.7 and basically unchanged for 2014 and 2015. Inflation was slightly revised lower and remained below 2% throughout the entire projection period.

During the press conference yesterday, equities erased their initial gains and EUR/USD lost part of these. However, bonds couldn’t reverse course and slid even slightly further. Bernanke sounded a bit pessimistic on the fiscal cliff and warned that its effects could be substantial. The Fed added they couldn’t offset the impact, even if Bernanke suggested they may try to soften the blow. All in all though the losses of Treasuries were technically insignificant.  The euro remains below the 1.31 psychological price and is weak, but the weakened US dollar continues to allow gains for the euro. As markets absorb the Fed’s stimulus the dollar is expected to regain taking back the short term gains of the euro. As the overall picture for the euro remains negative. The approval of a bank regulator is a positive factor for the euro but not enough to support it against the recovery of the US economy. Once the US has put aside the fiscal cliff which will be finished in the next weeks, the dollar will regain its lost ground.