FOMC MEETING MINUTES AND RUPEE

Freefall in exchange value of our currency has forced analysts to look for clues on its future. One of the popular clues is the minutes of Federal Open Markets Committee (FOMC) meetings. Latest meeting took place on 30th and 31st July. Minutes were released yesterday (21st Aug.)

 

Analysts were mainly interested in hints on future pace of Quantitative Easing (QE) and  when it will be withdrawn. Markets in emerging economies benefited from the Federal Reserve printing dollars to purchase securities because the dollars found their way to EEs which offered higher yields. Indian economy was a significant beneficiary. Any letup in QE will reverse the movement of dollars. Ben Bernanke has already conditioned the world markets to understand that QE cannot go on for ever.

 

In this context it was to be expected that observers would look for clues from minutes of FOMC meeting with eagle eyes. They were also preparing to read between the lines. But the minutes have been so deftly drafted that , according to BBC, instead of providing clarity, the minutes have only added more obfuscation. Please read the following para and find out if you are any wiser:

 

"In their discussion of monetary policy for the period

ahead, members judged that a highly accommodative

stance of monetary policy was warranted in order to

foster a stronger economic recovery and sustained improvement

in labor market conditions in a context of

price stability. In considering the likely path for the

Committee’s asset purchases, members discussed the

degree of improvement in the labor market outlook

since the purchase program began last fall. The unemployment

rate had declined considerably since then,

and recent gains in payroll employment had been solid.

However, other measures of labor utilization—

including the labor force participation rate and the

numbers of discouraged workers and those working

part time for economic reasons—suggested more modest

improvement, and other indicators of labor demand,

such as rates of hiring and quits, remained low.

While a range of views were expressed regarding the

cumulative improvement in the labor market since last

fall, almost all Committee members agreed that a

change in the purchase program was not yet appropriate.

However, in the view of the one member who

dissented from the policy statement, the improvement

in the labor market was an important reason for calling

for a more explicit statement from the Committee that

asset purchases would be reduced in the near future. A

few members emphasized the importance of being patient

and evaluating additional information on the

economy before deciding on any changes to the pace of

asset purchases. At the same time, a few others pointed

to the contingent plan that had been articulated on

behalf of the Committee the previous month, and suggested

that it might soon be time to slow somewhat the

pace of purchases as outlined in that plan. At the conclusion

of its discussion, the Committee decided to

continue adding policy accommodation by purchasing

additional MBS at a pace of $40 billion per month and

longer-term Treasury securities at a pace of $45 billion

per month and to maintain its existing reinvestment

policies."

 

Not knowing how to interpret this mumbo-jumbo, Rupee is continuing its downward journey. Commercial banks hedge their transactions. Central banks hedge their communication.