After many months of speculation, the FOMC finally took the plunge and announced they will embark on a third round of quantitative easing, with the committee deciding to purchase additional mortgage-backed securities to the tune of $40 billion per month. In addition, the Fed will continue its existing program known as operation twist while extending its policy to reinvest maturing agency debt and mortgage-backed securities. The Fed’s forward guidance was also extended with the statement showing the committee believes “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” In previous correspondence, the Fed had forecast exceptionally low rates through mid-2014. The Fed noted the reboot of its asset purchases should put “downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
Although the decision was warmly welcomed by markets, the committee failed to provide markets with finite details on the purchases such as the length of time and total size, stating “determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”As anticipated, Richmond Fed President Jeffrey Lacker opposed additional asset purchases while also preferring to omit the forward guidance.
The clear loser out of the Fed’s latest efforts is of course the U.S dollar, which is innately averse to what market’s see as an unsterilized dilution of its core value. Whether the Fed’s third round of easing will translate to job creation remains to be seen, however its psychological merits are abundantly clear with equities, commodities, and risk currencies responding in kind. Market’s had broadly anticipated Fed action in today’s meeting which took some the sheen of the ensuing rally, nevertheless, it’s a clear win for those long risk ahead of the decision.
The euro move to fresh 4-months highs against the greenback, but failed to make a break to the upside of $US1.30 while the Kiwi lead the commodity bloc offensive higher, peaking at 83.24 US cents in recent minutes. The Aussie dollar once again crossed the 105 US cents barrier but had little left in the tank after topping out at 105.7 US cents. With little in the way of local market moving themes, risk currencies will rely upon residual support in Asian trade with regional equities likely to set the pace as investors react to the Fed’s latest efforts.