The Fed Holds Back

After roughly a week of anticipation, the Fed gave the markets nothing new.

Stocks closed lower in a see-saw session yesterday after the Federal Reserve maintained its current monetary policy. Though the central bank left the door open for additional stimulus should conditions warrant, they also held back on fresh measures that were expected from the policy making body.

Fed officials acknowledged that the world’s largest economy had “decelerated somewhat,” but kept mum on which policy direction to take, dashing expectations among some investors and sending risk assets such as stocks and commodities lower.

In an interview with Randy Kroszner, Former Fed Governor and now Professor Of Economics at University of Chicago’s Booth School of Business, at CNBC Asia’s “Squawk Box”, Krozner said that the Fed could have provided a “little bit more guidance” to boost market confidence.

Besides signaling that they would buy more assets in the mortgage markets to lower the borrowing costs of consumers, Fed officials could also be more outspoken on future moves.

“They can also consider some what I call “open mouth” operations, rather than open market operations,” Kroszner said. “They’ve made a clear commitment to do something because in the last statement, they said they were prepared to take further action. Here, they say that they will act if things don’t get better. So they could give clearer explanation for what are those conditions.”

For example, the Fed could say they will act when inflation is below their target of 2 percent or when unemployment rate is above 8 percent, says Kroszner. “They might say, listen, those are the conditions under which we will act. And I think that will give a little bit of boost of confidence to the markets.”

Although the Federal Reserve disappointed the market by not extending its guidance for low rates further into the future, the central bank said in its statement, “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed.”

Referring to the “will provide additional accommodation” language in the statement,  Jeff Applegate, Morgan Stanley Smith Barney’s chief investment officer, told CNBC, “I think this paves the way for the Fed to move in the next month or in September.”

Article by AlgosysFx Forex Trading Solutions