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The Fed surprised the market by maintaining the asset purchase program. The Chairman reconfirmed 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.
On the continuation of the asset purchases, the Fed remained non committal, noting that Fed decisions on the pace of asset purchase is contingent on its assessment of economic outlook.
On economic data prints, Fed noted that information since July'2013 policy meeting suggest that economic activity is expanding at a modest pace. The Fed downgraded their assessment of the economic recovery in 2013 and 2014. The Fed expect the economy to grow by 2.0-2.3% in 2013 significantly lower than previous expectation of 2.3-2.6%, mainly led by a.) drag from the fiscal consolidation and b.) tighter funding conditions in light of Fed QE tapering expectation.
In nutshell, Fed is of the view that "the downside risks to the outlook for the economy and the labor market have diminished substantially, though not enough to start tapering its asset purchase program.
While "no tapering" may lead to some respite, it should also be borne that tapering is inevitable in the medium term. This outcome will prolong the uncertainty till the next meeting i.e. December. From EM perspective, it buys time to embark on the path of structural reforms and address domestic concerns.
In terms of market performance, today's non committal stance does provide temporary respite in the immediate near term. We expect a "risk on" scenario in the near term, with pressure off the EM currencies, particularly Indian Rupee, Brazilian Real, Indonesian Rupiah and Turkish lira, the most stressed of the EM currencies.
Please refer to the attached document for the detailed report
