The FOMC announced new policy measures: monthly buys of $45 billion of treasuries, substituting Operation Twist that ends at the end of the month. This joins the $40 billion in MBS, making it a total of $85 billion. Unemployment limit 6.5%, as long as inflation expectations remain under 2.5% for the upcoming year or two.
The numerical thresholds are a surprise. Currencies rock and roll but haven’t chosen a direction yet. Ben Bernanke will hold a press conference at 19:!5 GMT.
Update: after the initial confusion, stocks are moving up, and so is the euro against the dollar: 1.3075. USD/JPY is rather stable around 83.
- There are big questions about how the Fed determines inflation expectations for one to two years. This leaves a lot of uncertainty.
- Also the unemployment rate target is surprising, given that Bernanke focuses on the “big picture of unemployment”, including the participation rate and employment to population rate.
Here is the key part of the new thresholds for the statement:
the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
The market is still digesting these numbers. As usual, one member, Jeffrey M. Lacker, dissented, as he disagreed with both the asset purchase program and the new guidance.
— Updates coming —
In September, the Fed announced QE3, also called “QE-Infinity”: monthly buys of Mortgage Based Securities, without any limit. This joined the ongoing “Operation Twist”, that is worth $45 billion a month. Operation Twist comes to an end at the end of the month / year.
Expectations stood on an announcement of more outright purchases to replace the twist.
In addition, some had expected that Fed to change the guidance towards future rate moves: so far, the Fed had a guidance of keeping rates low until 2015. Several FOMC members suggested that this guidance should be tied to economic goals, such as keeping rates low until unemployment drops below 7% and as long as inflation remains under 3%.
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