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17 Dec 2013
Flash: FOMC options – Rabobank
FXstreet.com (London) - FXstreet.com (London) - Strategists at Rabobank look at the likely hood of a taper this week and other options.
Key Quotes:
“If the FOMC were to decide to taper this week, we are also likely to see an attempt to assure the markets that the first rate hike is still far in the future. That would soften the upward impact on longer-term rates from the tapering decision”.
“One option is that the threshold for abandoning the near-zero interest rate policy is reduced to 6.0% unemployment from 6.5%. However, changing that threshold so soon would damage the FOMC´s credibility. What will stop them from changing it again in a few months?”
“A more likely option is to stress (again) that the 6.5% is only a threshold and not a trigger: at that unemployment rate the Committee will start considering raising the fed funds target rate, but it would take into account a number of (labor market and other) variables, not just the unemployment rate. This could mean that there may be a considerable delay between the unemployment rate reaching the threshold and the first hike in the fed funds target rate”.
“A final option would be to lower the interest rate on excess reserves, but the risk-return trade-off, with possible adverse consequences for banks and money market funds, does not seem very appealing”.
Key Quotes:
“If the FOMC were to decide to taper this week, we are also likely to see an attempt to assure the markets that the first rate hike is still far in the future. That would soften the upward impact on longer-term rates from the tapering decision”.
“One option is that the threshold for abandoning the near-zero interest rate policy is reduced to 6.0% unemployment from 6.5%. However, changing that threshold so soon would damage the FOMC´s credibility. What will stop them from changing it again in a few months?”
“A more likely option is to stress (again) that the 6.5% is only a threshold and not a trigger: at that unemployment rate the Committee will start considering raising the fed funds target rate, but it would take into account a number of (labor market and other) variables, not just the unemployment rate. This could mean that there may be a considerable delay between the unemployment rate reaching the threshold and the first hike in the fed funds target rate”.
“A final option would be to lower the interest rate on excess reserves, but the risk-return trade-off, with possible adverse consequences for banks and money market funds, does not seem very appealing”.