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Forex: FOMC Sticks to Current Policy- Upbeat on Housing, Consumption

David Song

THE TAKEWAY: FOMC Maintains Current Policy > Housing Shows Further Improvement, Consumption Remains Resilient > Esther George Dissents > U.S. Dollar Outlook Remains Bullish

The Federal Open Market Committee (FOMC) held an improved outlook for the world’s largest economy, stating that the housing sector has shown further improvement, while the central bank noted an advance in household and business investments as the economic recovery gradually gathers pace.

Although economic activity has ‘paused in recent months,’ the Fed said the lull is transitory due to unfavorable weather conditions, and went onto say that inflation expectations remain stable even as the central bank continues to press on with its highly accommodative policy stance.

Indeed, the Fed maintained the $85B monthly target for its open-ended asset purchase program, and said it will continue to embark on its easing cycle for a ‘considerable time’ amid the protracted recovery in the labor market. However, as a growing number of central bank officials highlight the resilience in private sector consumption along with the budding recovery in the housing market, the Fed continues to face limited scope to expand the balance sheet further, and we may see the central bank slowly move away from its easing cycle in 2013 as the world’s largest economy gets on a more sustainable path.

At the same time, we saw voting member Esther George dissent against the majority as the highly accommodative policy stance heightens long-term inflation expectations.

Forex_FOMC_Sticks_to_Current_Policy-_Upbeat_on_Housing_Consumption_body_ScreenShot212.png, Forex: FOMC Sticks to Current Policy- Upbeat on Housing, Consumption

Despite the initial downtick in the USDJPY, the lack of follow-through continues to favor a bullish outlook for the greenback, and the bullish sentiment surrounding the reserve currency should gather pace going forward as the central bank drops its dovish tone for monetary policy. The shift central bank rhetoric should increase the appeal of the U.S. dollar in 2013, and the USDJPY remains poised to push higher amid the deviation in the policy outlook.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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