Dollar Dived As Fed Avoids Taper

Financial markets were rocked by the FOMC's decision to keep the pace of asset purchases unchanged at $85b a month overnight. DOW rose 147.21 pts to close at new record high of 15676.94. S&P 500 also rose 20.75 pts to close at new record high of 20.76. 10 year yield tumbled to close at 2.708% and breached an important support level at 2.707%, which suggests larger fall ahead. Gold rode on weakness in dollar and jumped back to 1360 level while crude oil also strengthened back above 108 level. Dollar index suffered a sharp loss and broke an important support of 80.50, which indicates larger trend reversal. In the currency markets, dollar plummeted against all other major currencies with Aussie and Kiwi gaining most.

To our and the market majority's surprise, the Fed refrained from tapering QE measures in September. Although the job market has shown signs of improvement, policymakers believed that the outlook has remained uncertain and they were concerned that premature tightening would lead to slowdown of the economic recovery. Bernanke hinted several months ago about tapering in September, it failed to materialize. Regarding the timing for tapering to really take place, the Chairman stated that "there is no fixed calendar schedule" and "if the data confirm our basic outlook" for economic recovery and the employment market, "then we could begin later this year". He also stressed that the first rate hike might not come until the unemployment rate is "considerably below" 6.5%. the unemployment rate slipped to 7.3% in August.

The new set of economic projections indicated policymakers remained cautious about the economic outlook. For 2013, the range of GDP growth was lower to +1.8% to +2.4% from June's projection of +2.0% to +2.6%. For 2014, GDP growth would reach a range of +2.2% and +3.3%, down from +3.3% and +3.6% in June. The outlook for the job market has improved. The unemployment rate would reach 6.9% to 7.3% this year, compared with June's prediction of 6.9% to 7.5%. For 2016, the Fed is predicting an unemployment rate of 5.2% to 6%. In 2016, the Fed will target a rate closer to 2% although this is not the consensus.