Markets to keep grappling with Fed surprise decision, upcoming hurdles

In a surprise move last week, the US Federal Reserve's Federal Open Market Committee (FOMC) announced "no taper" at the end of its September meeting. Hence, the Fed will continue to purchase securities at current pace of USD 85 billion per month. Other policy tools and fed funds rate target also remain unchanged, said an NBK report. Financial markets were anticipating reductions in securities purchases (QE3) to be announced this September, with an initial mild cut of USD 10-15 billion. After the surprise announcement, the US 10-year note rallied 15 bps, to 2.70 percent, the two-year note eight bps to 0.31 percent. The Dow Jones Industrials rallied 150 points to a record high, and the USD fell from 1.335 against the EUR to 1.355, it showed. In its announcement, the Fed cited "moderate growth" and improved "downside risk" for the economy, but still wanted to see further "evidence of progress" and of sustainability. Unemployment remains too high, inflation well below an objective of two percent or more, and the fiscal side is pressuring the economy somewhat (last year's sequester, and potential for more cuts and/or debt ceiling disruptions in October), it said. The Fed also released members' expectations and forecasts. The central estimate for 2013 real GDP growth is now 2-2.3 percent (from 2.3-2.6 percent in June), other projections for inflation and unemployment were unchanged or a touch lower from June's, the NBK report added. During a press conference, Fed Chairman Bernanke re-emphasized that the economic data will be driving the Fed's decisions ahead, both on "taper" and on short rate policy. The federal funds rate is still poised to remain near zero for the foreseeable future. Bernanke stated repeatedly that the Fed will consider raising short rates only after unemployment reaches 6.5 percent or less, from the current 7.3 percent (and provided inflation remains under control). Over the next few weeks, one further, but important, concern of the Fed (and investors) is, once more, the Congressional fight over two important issues: budget and debt. The first relates to the funding of the US government into the new fiscal year, starting October 1. Democrats and Republicans disagree on budgetary issues but are also linking those to the implementation of President Obama's new massive health care plan, also due October 1, the report concluded.