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The Fed’s balance continues to grow | Forex Professor

The dollar continued its pullback as quantitative easing draws to a close despite a significant increase in the Fed’s balance sheet.

Yesterday, the US Federal Reserve released a statement on monetary policy. She, as expected, left everything unchanged, but for the dollar, things didn’t go bad until the press conference was over.

The Fed has kept its interest rate in the range of 0 to 0.25%, and monthly QE purchases at $ 120 billion. He has pledged to continue buying $ 80 billion in Treasury securities and $ 40 billion in Mortgage Backed Securities (MBS), despite a marked improvement in the economic outlook in recent months.

The graph shows the growth in the balance of the Federal Reserve System after the great financial crisis of 2008-2009. This shows that the response to the COVID-19 pandemic is superior to any easing made in the past decade. If the end is not in sight, what will become of the US dollar as the world’s reserve currency?

A subtle change in the Fed’s tone

The Fed’s message, while ultra-dovish, shifted slightly in tone. A phasing out announcement (that is, a slowdown in asset purchases) would have been a clear hawkish signal, but the Fed has yet to come. First, she wants more employment and even higher inflation.

However, the central bank made a somewhat hawkish update in its statement: previous mentions of the pandemic as posing a “significant” risk were replaced by comments about “remaining” risk (without mentioning “significant”). This suggests that the Fed is tracking improvements in the economy.

These statements are more important than you think. Traders should not be fooled by the complacency of the market and should remember who is wrong in their trades. The financial markets of the 21st century are dominated by trading algorithms that buy and sell based on differences between different texts, such as the difference between two successive FOMC statements.

In short, the Fed has sent a pigeon signal. First quarter GDP data, which will be released today, will show whether the Fed’s decision to keep the adjustment was correct. If GDP exceeds expectations, the market could put pressure on the Fed in the future.

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