The beginning of the end is at hand for the Federal Reserve Bank’s Quantitative Easing program as they now see an improving economy, a better employment environment, no inflation, and some semblance of sanity around the federal government’s fiscal situation. The Fed’s Federal Open Market Committee voted to reduce asset purchases from $85 bln per month to $75 bln starting in January and offered additional “qualitative forward guidance”.
Key FOMC comments:
- “The Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."
- “The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee's 2% longer-run goal."
- “We are monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term."
This move was not a consensus expectation, and, as a result of the announcement, the U.S. stock indices had their 3rd biggest 1-day rally this year (January 2nd and October 10th were #1 and #2, respectively). Interestingly, the 10-year U.S. Treasury yield, has moved north of 2.90% after the announcement, but remains relatively calm as we write; this has been the case since the beginning of the month and suggests maybe the “taper” has been discounted. This non-action in yield volatility is in contrast to the more violent moves around recent Quantitative Easing inflection points such as the middle of June when the Fed announced the taper is coming and in September when the Fed announced the taper was being delayed. Gold has been under pressure as its function as an inflation hedge falls and is currently trading below the psychologically important $1,200/oz level not seen since June/early July.
As a result of the change in monetary policy, our main focus going forward will be on the impact on capital markets and, ultimately, the economy.
Sources: Federal Reserve Bank