US on Brink of Deflation

For the first time during the credit crisis, the Federal Open Market Committee’s statement yesterday indicated concern about the worldwide forex economy weakening “significantly,” with “some risk” that inflation would remain below ideal rates. The Fed signaled it’s moving closer to buying long-term Treasuries and expanding its $600 billion program to buy home-finance debt,reported Bloomberg.
Federal Reserve officials warned of a prolonged global economic slowdown that may push the U.S. to the brink of deflation.
The dollar has rallied sharply following the FOMC’s monetary policy announcement, surging from 1.3280 against the euro to just above the 1.31-figure and jumping to 90.75 versus the yen.Following is related news from Forexnews.com.

2009 Monetary Policy Remains Unchanged:
The Fed left monetary policy unchanged at its current range of 0%-0.25%, saying that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”. The FOMC delivered a somber assessment of the economy; attributing the weakness to steep declines in industrial production, housing, and employment; thus prompting a retrenchment of spending by consumers and businesses.

Recovery Possible:
Although the Fed anticipates a rebound in the economy later in the year, it deems the downside risks as significant. Further, given the limited scope the Fed has to shift interest rates lower, it reiterated its stance to expand the quantity of agency debt and mortgaged-backed securities purchases to support the mortgage and housing markets. The FOMC also anticipates inflation pressures to remain subdued over the coming quarters.

Euro Withdraws:
US economic data is the focus for the Thursday session.The euro has retreated sharply following the FOMC’s policy statement. Traders are looking ahead to Germany’s January unemployment data, with the unemployment rate creeping higher to 7.7% from 7.6%.Visit my Google Group ForexUpdates for intraday currency pair updates.