FOMC MEET - THANKFULLY NO SHOCKERS; ANOTHER $10B SHAVED OFF

By Ruma Dubey

Unless there was a shocker, the Indian markets, as such were not expected to pay too much attention to Janet Yellen – all eyes in India are only on the poll results; nothing else seems to matter now.

So there was no shocker, the now routine $10 billion trimming in QE was announced, bringing down the monthly purchase to $45 billion. This is the fourth consecutive meet where $10 billion reduction in bond purchases was announced.

The Fed had very much indicated in March itself that GDP would be down but then had called it a temporary decline mainly caused by winter storms. But overall the statement, as expected is pretty upbeat.  The central bank now thinks the economy is strong enough to do without the stimulus and the Fed aims to end the bond-buying program by late 2014, barring any sudden deterioration in growth.

The Fed believes that the US economy is well on its track to improve in the second half of 2014 and by then, it expects momentum to pick up to be able to raise interest rates. All were expecting the Fed to give a timeline on the interest rate increase but Yellen left it at that, saying “it’s likely to keep the benchmark interest rate near zero for a considerable time after bond purchases end. But the consensus on the market is that rates could start going up by second half of 2015.

Naturally, this rate hike continues to depend on the pace of growth of the economy, unemployment rates and inflation.

Few hours before the FOMC meet, the US Q1 GDP numbers came in and it was not too encouraging. The GDP for the quarter grew by a meager 0.1%, the lowest in the past three years. More than this number, the US markets were spooked by the GDP internals – decline in investment in business equipment and residential home construction, falling US exports, drop in Govt spending and companies sitting on higher inventories. But there is a silver lining here – this poor show was widely expected due to cold weather but looking ahead, the economy, most expect it to be robust. In the GDP report, the 3% gain in consumer spending, which is the main driver of the U.S. economy comes as a real breather.

Highlights of the FOMC meet:

• Tapering of another $10 billion, bringing the total to $45 billion/month.
• Seems optimistic about the months ahead - expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually
• Sees the risks to the outlook for the economy and the labor market as nearly balanced.
• Inflation persistently below its 2% objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
• Maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. 
• Will  closely monitor incoming information on economic and financial developments in coming months and will continue with QE tapering until the outlook for the labor market has improved substantially in a context of price stability.
• Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
• For hiking interest rates -   will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation. 

There is no Press Conference following this Fed statement and thus nothing sensational was as such expected. The Indian markets are closed tomorrow and by Friday, this news may not have any impact, what with the all pervasive halo of elections engulfing all. For once, it will be India’s own factors which will decide the course of the Indian markets and not US Fed. May 16^th will now be the big trigger and FIIs, taper or not, will buy if election mandate comes in with a clear victory and not some hotch-potch Govt. Hopefully, the US too will be watching India on 16^th the way we stayed glue to their election outcome!