The FOMC forecast that rates expected to stay at exceptionally low rates “through at least late 2014”. But does that mean anything for this market’s unbearably short attention span?
My lowdown: this is a more dovish statement than I expected and I fail to understand why the Fed wants to put itself in a box on the expectation that it will keep rates at zero until late 2014, though the consensus seemed to be that the previous forecast of mid-2013 would be extended to further out. Otherwise, this was one of the least changed statements in recent memory. While the Fed did make a move in black and white on extending its expectations, this is a market that is gunning for QE3 and new expansion of the Fed’s balance sheet, and we don’t have any hint that the Fed is warming up for said QE except for the usual promise to “regularly review the size and composition” of its holdings. Obviously the data is too strong for the moment and we have to wonder what the Fed does if US economic data continues to improve and the CPI core sets new multi-year highs in coming months (i.e., my earlier points about the “irony of success”)
So I am wary of the initial reaction here beyond today or the next few days if this move holds, though the more dovish interpretation could be – “hey, if the Fed is willing to get dovish with this kind of data, imagine what they will do at the least hint of weakness in the economy.”
Market reaction
The USD is selling off initially, EuroDollars out the curve are going nuts for obvious reasons, and treasuries are rallying like crazy, which is pushing USDJPY back where it came from at first blush. Aussie is the biggest winner after its own rate expectations ran in the opposite direction last night. This is the old model of USD down/risk up for now. Gold is on fire as well due to the Fed’s dovishness.
A brief statement comparison
Exceptionally low rates
Now to stay at 0 to 1/4 per cent until “at least late 2014” rather than until mid-2013
Language on the economy:
Practically no change: now we have “business fixed investment has slowed” rather than “appears to be increasing less rapidly”
On inflation:
New statement deletes the sentence “ The committee will continue to pay close attention to the evolution of inflation and inflation expectations”
On operation twist:
Maintaining policy to “extend the average maturity” and roll-over maturing securities into MBS and Treasuries
John J Hardy
SAXO BANK