This is what I wrote in my weekly outlook October 4, 2010 report:

A closer look into the minds of the Federal Reserve members…

Dudley: “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long,”  (Pro QE)

Bullard: “I don’t think it’s likely that the [Fed] would go with some kind of ‘shock and awe’ where you do some big policy move all at once.” (Pro QE but gradual)

Fisher: said in a speech yesterday that the benefits of action may not outweigh the costs unless “fiscal and regulatory authorities are able to dispel the angst that businesses are reporting.” (Neutral on QE)

Plosser: “Asset purchases unlikely to have an impact on jobs; cannot overreact to volatile economic policy” (Against QE)

Kocherlakota:  said that QE II would probably have a “more muted effect” than purchases that ended in March. (Neutral QE)

Rosengren: Fed should respond “vigorously, creatively, thoughtfully and persistently” to a slow recovery… (Pro QE)

Evans: More actions may be “Desirable” but “Unconventional tools are the best option; concerned could be in a liquidity trap; US companies have a cautious outlook” (Neutral QE)

Hoenig: Remains the dissenter in FOMC votes and a vocal member against QE measures (along with Plosser). (Against QE)

It is easily see that the majority are either pro QE or neutral, with only two vocal dissenters (Hoenig and Plosser) against QE.  Which makes this month’s market reaction particularly important because if the economy is showing significant move in the right direction, the neutral members may shift their focus from an immediate action to a longer term approach proposed by Bullard and delay any large scale stimulus buying to the first quarter of 2011, which will bring USD back from the brink of collapse as we’ve seen in the past few months.

With mid-term election coming up, public perception is everything.  We may not see an immediate reaction from the Feds until next year anyways, but since the FOMC made the statement last meeting “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation,” market has already moved in an attempt to price in as if the Feds already announced a one trillion dollar QE package…  And judging by the nature of the market, which tends to “buy on rumor and sell on news”, the next move, may be a long period of consolidation, even profit taking, as we approach to the FOMC meeting on Nov. 2~3, 2010.

Here’s the entire FOMC Statement:

    “Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

    Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

    The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

    Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives. “

In conclusion, in light of how the market reacted after NFP on Friday October 8, 2010, I am inclined to think that there would probably be very little downside, if any, to the USD as result of FOMC Minutes.  The logic is very simple, as the market has already priced in for QE2, therefore a confirmation of such decision, or bias towards it, will be regarded as “inline with expectation”.  However, on the off chance that the FOMC is not so sure with its plan to go ahead on QE2, as Fed. Bullard implied in his interview with CNBC, or worse yet, a compromise of sorts that the Feds are looking at a gradual monthly purchases, we should see some strength returning to the USD…  Remember, after an exaggerated move of 1400 pips on the EURUSD, a consolidation (albeit minor) will be close to 500 pips.

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