The course is set for the exit from QE3

Fundamental analysis 18.06.2014

The outcome of the Fed meeting will be known on late Wednesday. Shrinking the QE3 by another $ 10 billion - is pretty much settled. It is unlikely that the regulator will retreat from its course to the full exit from the program by autumn. Thus, from the previous $ 85 billion the QE3 will “slim down” to a modest $ 25 billion, and hence the complete cessation of purchases of mortgage bonds and treasury obligations will happen in just two or three months.

Much more interesting will be the statements from Janet Yellen over the Fed's plans to increase the key rate. At her first press conference as the head of the Fed, she excited the market, noting that the first rate increase could take place six months after the final termination of QE3. Later on, however, her position has once again become blurred, saying that all will depend on the statistics. 

Recently a new IMF report on the U.S. economy was released, where estimates of GDP growth in the current year and in the long run were lowered. Moreover, the IMF believes that by 2017 the situation with the labour market will continue to be problematic. Therefore, as the head of the IMF, Christine Lagarde, explained that the organization does not see any reason for a rate hike from the Fed in the coming spring. 

Lagarde also focused on the inter-American debate to raise the minimum wage and tax relief for low-income people, supporting Barack Obama’s initiatives. Currently, the starting salary level in the United States is at the minimum levels of developed countries, and in a low-growth economy, more and more Americans make the minimum wage.

It is worth noting that the prospects for the adoption of these measures are rather vague because the Republicans are still strongly against them. However, when the low-income Americans are added to the "long-term unemployed", as well as a solid layer of part-time workers, the overall economic picture that emerges is clearly not in favour of starting a rate hike cycle in the coming year. 



Beside the rates and the already agreed reduction of QE3 by another $ 10 billion, it will be interesting to hear Janet Yellen’s comments regarding the timing of the deceleration of reinvestment processes in order to start gradually reducing the considerably bloated Fed balance sheet. In fact, any word on this subject will seriously shake up the markets, which is why I still hold my stop losses on my bearish trades fairly close. 

RoboForex research department Stanislav Koval