Fed Stays the Course

The FOMC left rates on hold and in general stayed the course. The long-term asset program was not extended and conditions were such that the FOMC expected rates to remain low for an extended period of time. Surprisingly, there was one dissent on this phrase from new voting member and known hawk, Hoenig. Hoenig argued the phrase "extended period" was no longer warranted. The dissent is surprising because the market had expected FOMC members to rally around the challenged Chairman. (We had highlighted Hoenig's hawkish stance in our Q110 quarterly section, Central Bank Hawk/Dove Barometers but had also noted that two doves, together with Hoenig, became voting members this year.)

Concurrently, the ECB and SNB announced they were discontinuing use of the franc/dollar swap lines while the ECB announced. This should not come as a major surprise. Today was the first time that that the ECB, SNB and BoE failed to attract a single buyer at the one week dollar auctions, a sign that the swap liines are not needed.

There does not appear to be much of a change in their economic assessment, including the sense that inflation will remain low for while. The Fed did drop their assessment of the housing market as expected.

With the (terse) statement out of the way, the immediate event risk has passed and the market will continue to do as it was. In the current environment, with the weak credits in Europe and Chinese tightening monetary conditions dominating, the table is tilted toward the dollar. Much of the details of the State of the Union speech have largely been leaked and the markets judges them not to be game changers. Friday's US Q4 GDP report is the next main US data and a strong report is expected and should help underpin dollar sentiment.