Fed keeps policy rate unchanged; asset purchases to continue in the near term - ICICI Bank : Treasury Research

In the policy meeting, the Federal Reserve maintained the policy rate i.e. Fed funds rate unchanged at 0-0.25%.

On the unconventional measures, the Chairman reiterated that the Fed would continue to buy longer-term US treasury securities at the rate of USD 45 bn/month and the Agency MBS at USD 40 bn/month.

The key highlights of the policy announcement

On economic data prints, Fed noted that information received since June'2013 policy meeting suggests that economic activity expanded at a modest pace during the first half of the year.

Q2 GDP data released today too points toward a modest recovery in economic activity at best. The US economy grew by 1.4% at an annualized rate in H1'2013. In the last FOMC meeting, the Fed expected US economy to grow in the range of 2.3%-2.6% in 2013. To attain that kind of growth US economy will have to grow by 3.2% -3.8% in H2'2013. At this point this seems highly unlikely.

On prices, Fed recognizes that inflation has persistently remained below its 2% objective and could pose risks to economic performance.

In nutshell, Fed is of the view that "the downside risks to the outlook for the economy and the labor market have diminished substantially".

Conclusion: Dovish outlook suggest less probability of QE tapering in September

We think that the overall tone of Fed announcement is relatively dovish as compared to the last few meetings. Firstly, it is highly unlikely that US economy will achieve 2.3%-2.6% growth in 2013, given the fact that US economy has realized 1.4% annualized growth in H1'2013. In the September policy meeting, the Fed might most likely revise down its GDP growth projections for 2013. Secondly, the Fed highlighted the risk pertaining to below "target" inflation. As per these assessments, we assign very low probability to QE tapering in the near term (i.e. September policy meeting).

Source : Equity Bulls

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