The Federal Reserve announced QE4 and gave new guidance: rates will remain low until the unemployment rate will fall to 6.5% as long as inflation expectations for the next year or two remain under 2.5%.
This was the big surprise in the Fed decision in addition to the expected announcement of QE4: $45 billion of treasuries. Looking at the details, the announcement is extremely dovish. There is no exit to easing in sight.
Update: Follow the live blog of Ben Bernanke’s press conference.
- Vague inflation targets: The Fed linked its low rates to an unemployment rate of 6.5% as long as inflation expectations remain up to 0.5% above the 2% target for the next year or two. There are many questions here:a) How does the Fed measure inflation expectations?
b) What is the Fed’s definition of inflation? It is core inflation, excluding food and energy, as if people don’t or don’t drive / warm up their houses.
c) Flexible target: the definition of between one and two years speaks for itself. - Flexibility on employment target: This is from the statement: “the Committee will also consider other information, including additional measures of labor market conditions” – so, Bernanke still wants to look at the participation rate, employment to population rate and other measures. So, 6.5% is subject to changes.
- Maximum QE: While $45 billion of treasury buys was widely expected, there was some talk of a smaller move. There is no more twist, only outright purchases.
- No more dates: Up to September, QE programs had a limited timeframe and low rates guidance had a time limit (moving from mid 2013 all the way to 2015).. In September, QE3 was announced and it was open ended, but Operation twist had an end date, and so did the guidance.From this statement, there are no more dates: only bond buying programs and employment / targets which are a bit vague. This leaves the Fed a lot of room to leave the rates low to infinity.
In the short run, we may have some “buy the rumor, sell the fact” behavior, as the market unwinds pre-FOMC positions.
In the longer run, only a huge acceleration in the US economic activity will trigger some tightening from the Fed. At the moment, the economy is doing OK, but it is certainly not on a roll. Open ended monetary easing could keep the pressure on the greenback for a long long time.
What do you think?
Further reading: Trading the Fiscal Cliff: Different Currencies for Different Scenarios.
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