Doves Rule at the FOMC

The Federal Reserve was as aggressively dovish as any one expected. It added to QE $45 bln a month in US Treasuries, keeping the $40 bln of month of MBS purchases. It also changed from time reference for guidance to use of inflation and even there it is dovish, indicating rates will remains low as long as inflation is below 2.5% and unemployment is above 6.5%.

This was the main focus of the statement. The general economic assessment seemed little changed and Lacker continued with his dissent, opposing the new asset purchases and the "characterization of conditions" that exceptionally low interest rates would be justified.

The euro had been bid just prior to the FOMC statement on news that Berlusconi indicated he may withdraw his candidacy if Monti would run. The FOMC announcement saw the dollar decline across the board. Treasury yields rose. The 30-year yield was already at one month highs prior to the FOMC outcome. The 5-year/5-year forward that Fed officials has sometimes cited for a measure of inflation expectations was near 18 month highs and spiked higher on the announcement. The equity market advanced on the news.

The expansion of the open-end QE is not surprising. There may be some disappointment that the Fed did not boost its MBS purchases. We had suggested the possibility that the Fed would not double down on QE. The move to macro-economic guidance has been discussed, but most thought it likely to be adopted in early 2013. The guidance is such that it reinforces the idea that the Fed will not be raising rates in for some time--not in 2013, and not in 2014 and maybe not even in 2015.