TD Securities
Fed outlines extension of QE3. MBS purchases of $40B a month will be continued, and $45B of Treasury purchases,
all financed through balance sheet expansion. Total QE rises from $40B to $85B a month (as expected) as the
$45B under twist now financed by QE.
ƒnThere was no timeframe. Open-ended QE looks even more open-ended. Buying will continue ¡§if the outlook for the
labor market does not improve substantially.¡¨
Numerical targets to benchmark progress were also released, one or two meetings sooner than expected.
Inflation target rose from 2% to 2.5% and the unemployment target was set at 6.5%. If the Fed was going to err it would be on the side of too much rather than too little, and while the numerical monthly allotments matched our expectations, the balance of Fed actions tilted toward more rather than less:
First, numerical targets illustrate the bias is toward getting more inflation. Raising the inflation target to 2.5% is a tacit admission that risks remain skewed toward disinflation and policy will remain focused on juicing up the growth mandate. The unemployment rate target of 6.5% is at the top end of the 6% to 6.5% we expected, but is sufficiently low to be bullish for bonds. Moreover, hitting 6.5% does not mean the Fed will tighten, it is only a benchmark. Policy will remain as much art as science.
Second, this is the first time the Fed has done QE without a specific time frame. In being tied to economic outcomes on jobs and inflation, QE could last 2 months or 22 months. This is very dovish and represents a big step in the maturation process of QE, the policy tool left at the zero-bound. ¡§Substantial improvement in the labor market¡¨ is likely viewed in sustained job growth at 200k, or more. The emphasis here is on jobs not unemployment. Lower unemployment rates driven by falling participation rates will not diminish the appetite for QE. That doesn¡¦t mean they won¡¦t adjust the size and composition of their purchases, they most certainly will, but the intention is to show the Fed is in for the long haul. How this program will evolve will depend critically on how Washington achieves a fiscal fix. If the Bernanke put was implicit it is now decidedly explicit. The chart is emblematic of the output gap the Fed is trying to overcome, and why their base view is that inflation is likely to remain below the target rate for some time. We need to invent a new word to describe the Fed, perhaps militant dovish?
We expected the appetite for QE to diminish in QE3 2013 as we begin to generate 200k jobs a month.
The meeting today suggests QE may now continue even longer.
Fed outlines extension of QE3. MBS purchases of $40B a month will be continued, and $45B of Treasury purchases,
all financed through balance sheet expansion. Total QE rises from $40B to $85B a month (as expected) as the
$45B under twist now financed by QE.
ƒnThere was no timeframe. Open-ended QE looks even more open-ended. Buying will continue ¡§if the outlook for the
labor market does not improve substantially.¡¨
Numerical targets to benchmark progress were also released, one or two meetings sooner than expected.
Inflation target rose from 2% to 2.5% and the unemployment target was set at 6.5%. If the Fed was going to err it would be on the side of too much rather than too little, and while the numerical monthly allotments matched our expectations, the balance of Fed actions tilted toward more rather than less:
First, numerical targets illustrate the bias is toward getting more inflation. Raising the inflation target to 2.5% is a tacit admission that risks remain skewed toward disinflation and policy will remain focused on juicing up the growth mandate. The unemployment rate target of 6.5% is at the top end of the 6% to 6.5% we expected, but is sufficiently low to be bullish for bonds. Moreover, hitting 6.5% does not mean the Fed will tighten, it is only a benchmark. Policy will remain as much art as science.
Second, this is the first time the Fed has done QE without a specific time frame. In being tied to economic outcomes on jobs and inflation, QE could last 2 months or 22 months. This is very dovish and represents a big step in the maturation process of QE, the policy tool left at the zero-bound. ¡§Substantial improvement in the labor market¡¨ is likely viewed in sustained job growth at 200k, or more. The emphasis here is on jobs not unemployment. Lower unemployment rates driven by falling participation rates will not diminish the appetite for QE. That doesn¡¦t mean they won¡¦t adjust the size and composition of their purchases, they most certainly will, but the intention is to show the Fed is in for the long haul. How this program will evolve will depend critically on how Washington achieves a fiscal fix. If the Bernanke put was implicit it is now decidedly explicit. The chart is emblematic of the output gap the Fed is trying to overcome, and why their base view is that inflation is likely to remain below the target rate for some time. We need to invent a new word to describe the Fed, perhaps militant dovish?
We expected the appetite for QE to diminish in QE3 2013 as we begin to generate 200k jobs a month.
The meeting today suggests QE may now continue even longer.
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