Market Insider

Published: Wednesday, 4 Nov 2009 | 10:03 AM ET

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The Fed's statement is likely to be uneventful, despite all the buzz about the sinking U.S. dollar.

Traders have been talking about the November Fed statement for days now, because even a subtle tilt in the Fed's posture on interest rates could unhinge the popular "risk on" trade.

That is where investors bet against the U.S. dollar and throw money into risky assets such as stocks and commodities. Ahead of the meeting, the dollar was moving lower, commodities and equities were moving higher, and bond prices were falling, driving yields higher.

Gold has been the most dramatic mover this week. Often seen as a safe-haven play or inflation hedge, gold has soared to record levels as investors bet the Fed will do nothing to stem the dollar's fall.  A large gold purchase by the Indian government also drove prices higher.

"No change of policy is likely. If there are any changes in the language, it's just to give flexibility for when there is a change, so that the comment made now doesn't sound too iron clad," said Pimco senior strategist Tony Crescenzi in a recent interview.

AP

The statement is expected to be released at 2:15 p.m., after the Federal Open Market Committee winds down its second day of meetings. The November meeting is the Fed's second to last of the year, and it is widely anticipated it will do nothing before January, at the earliest.

"It's pretty clear they're not going to pull the trigger this week," said Stephen Stanley, chief economist at RBS. "I don't think they're on the cusp of changing the language because I don't think they have any expectation they are going to be tightening any time soon. We look at that and say it's more of a January proposition, and if you thought they were changing the language in January, then they're maybe moving at mid-year."

The Fed's low-rate policy and the growing U.S. deficit have been weights on the dollar, but the low rate environment has also helped to reflate the stock market.

Crescenzi, in a note, said the Fed should indicate more specifically the type of economic and financial conditions that would justify the current language that it sees "exceptionally low levels of the federal funds rate for an extended period." If it were to do that, investors would have a better idea of what would determine a change in policy and would respond incrementally to changing economic conditions rather than suddenly to a shift in the Fed policy statement.

"The market is very sensitive to even modest changes in the wording. You can see how nervous people are by looking at the short end of the (Treasury) curve," said Marc Chandler, head currency strategist at Brown Brothers Harriman.

The target Fed funds rate has been at zero to 0.25 percent, and the part of the Fed statement traders have focused on is the part that says the Fed will keep rates low for an "extended period."

"If they dropped that extended period, I think the dollar would react positively even if the stock market sells off," said Chandler.

Economists say the Fed is likely to acknowledge an improved economic outlook, but it is watching for a turn in the employment picture before it changes its stance. The next good look at the jobs situation is Friday, when the government releases its October employment report.

Even if it doesn't alter its statement, Fed committee members are expected to spend time discussing change, which will make the minutes of the meeting important to markets when they are released next month.

"There's this massive chasm at the FOMC between the hawks and the doves. Maybe more than I've ever seen. I think these policy debates are pretty...heated...is the right word. But there is some pretty substantive disagreement among the committee members about where we are and where we're likely to be headed," Stanley said.

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