Fed On Hold For Longer
The FOMC surprised markets by first pledging to leave rates on hold until late 2014 and secondly committing to an explicit inflation target. The Fed will target the y/y change of core personal consumption expenditure (PCE) at 2%, moving away from the previous informal target range of around 1.7% to 2%. The Fed also said it was not appropriate to adopt a fixed goal for employment because “the level of unemployment that can be achieved without sparking inflation is not largely determined by monetary factors”. The dollar fell across the board upon the announcement, reversing the gains from the previous sessions. Risk assets rallied, and the euro broke through 1.31. In the post-statement conference Bernanke said that unless there’s a substantial strengthening in the economy, the Fed will be holding those unusually low rates for a long time. He also said that leaving rates on hold until 2014 implies that sales of the balance sheet will not come before 2015. In the first ever “longer-run goals and policy strategy” it was revealed that 11 of the 17 members believe a rate hike is not appropriate before 2014. This change in strategy is likely to add further scope to the recent risk rally and will be encouraging for investors looking to move back into risk assets in the short term. Earlier, there was more strong data out of Germany with the IFO improving once again while the January BoE minutes showed a 9-0 vote split for no change in rates and the asset purchase program. The minutes acknowledge that the most serious near-term risks have moderated, but the overall tone remains dovish. As expected the RBNZ left its cash rate on hold but NZD was swept higher as part of the dollar move. Ahead today, there are few major policy announcements in the G10 space but markets will remain sensitive to news announcements out of the Eurozone as investors analyse the changes to Fed policy. EURUSD traded in a range of 1.3121-1.3047 and USDJPY 77.56-76.98.
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UBS Investment Bank