[Dan]

The next instalment of the Federal Open Market Committee (FOMC) interest rate decision will be delivered on June 24. However, as has been the case in the past few months, with the Fed explicitly committing itself to keeping interest rates “exceptionally low” for an extended period of time, the actual interest rate announcement is unlikely to attract much attention. Instead, the focus will undoubtedly be on the tone and content of the statement. Of particular interest will be whether the Fed attempts to engineer a reversal in the recent back-up in consumer borrowing rates by either going beyond its well rehearsed phrase on keeping rate exceptionally low and/or announcing an increase in the size of the asset purchase program. In this regard, there is a nontrivial risk that the Fed may perhaps follow the lead of the Bank of Canada and explicitly delineate a timeline over which rates will be held accommodative. Similarly, an announced increase in the size (or modification) of the asset purchase programs could achieve the same objective. However, some believe that both outcomes have a less than 50% probability of occurring. In terms of the economic and inflation outlook, analysts expect the economic assessment to remain largely intact, though the recent manifest upturn in a number of economic indicators may engender some positive remarks from the Committee. It is also believed that the Fed will repeat its concerns about price inflation persisting below levels consistent with price stability, and reaffirm its commitment to employing “all available tools to promote economic recovery and to preserve price stability.

Going into the last (April 29) FOMC meeting, there was some expectation that the Fed would increase the amount of its Treasury purchases; when that didn't happen, we saw the USD rally in relief that there was no expansion of QE. However, market expectations seem to be much more muted this time around with respect to further measures from the Fed. Therefore we don't see much opportunity for disappointment, and tomorrow's FOMC meeting could be one of those "non-event" type of announcements that we haven't seen in some time, with little currency market reaction to the FOMC statement itself. However, after a couple of weeks of consolidation, we could soon see the USD resume its downward trend once the excuse of event risk is behind us.

This Fed decision appears to come down to whether an exit strategy is discussed (bond bearish) or not, and whether an enhancement to the Fed's asset purchase program is announced (bond bullish) or not. Market sense is that neither of these things will receive any substantial alteration, and so both the bond bears and the bond bulls may emerge disappointed.