The Federal Reserve ramped up its stimulus to the economy on Wednesday, expressing disappointment with the pace of recovery in employment as contentious U.S. budget talks heighten uncertainty about the outlook.
KEY POINTS: * The central bank replaced a more modest stimulus program due to expire at year-end with a fresh round of Treasury purchases that will increase its balance sheet. It committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion per month in mortgage-backed bonds it started buying in September. * In a surprise move, the Fed also adopted numerical thresholds for policy, a step that had not been expected until early next year. In particular, the Fed said it will likely keep official rates near zero for as long as unemployment remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than 2.5 percent, and long-term inflation expectations remain contained. * "The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Fed said in a statement.
COMMENTS: MARK ZANDI, CHIEF ECONOMIST, MOODY'S ANALYTICS, WEST CHESTER, PENNSYLVANIA:
"It's a very bold move, more than anticipated. They came through with more quantitative easing. The communication was well ahead of expectations. They said they will stay aggressive with policy until they are sure the economy is moving forward and gain traction, given the fiscal issue we are dealing with.
"The size of the purchases was close to consensus. The mix of the purchases was only in Treasuries so there might be a little bit of the surprise for some. I had expected a mix of Treasuries and mortgage-backed securities.
"The 6.5 percent threshold on the jobless rate is a bold one. By their forecast, it still will be well into 2015 before they will hike rates. It's still consistent for a rate hike in the second half of 2015.
"By my measure, the jobless rate could fall below 6.5 percent by the end of 2014 or spring 2015.
"Who's on FOMC means less 2013 because they have written the script in their foreseeable future. It put monetary policy on auto-pilot. This might be the last major move for the Bernanke Fed unless things sharply deteriorate from here."
PETER HOOPER, GLOBAL CHIEF ECONOMIST, DEUTSCHE BANK, NEW YORK:
"The Fed certainly has continued with their balance sheet expansion policy, as expected, because the economic situation has not changed appreciably. They did come to an agreement on the levels of unemployment and inflation that might trigger a move on interest rates down the road. We were expecting this early next year, but we got it a little sooner than expected. These are guidelines. This is to inform the market about how they are thinking. These are not absolute commitments because many other factors could affect the picture."
OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON D.C.:
"This move by the Fed to replace Operation Twist was expected but also clearly a step toward further monetary easing and the expansion of its balance sheets is negative for the dollar. Having said that a lot of the Fed's announcement is already priced into the market, so we did not get much of surprise. The scope for further dollar losses may be somewhat limited, especially with so much uncertainty in the markets about the U.S. fiscal cliff. Uncertainty about the euro zone, concerns about Italy and the Japan election this weekend should also limit dollar losses."
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA, NEW YORK:
"There's no big surprise in terms of the volumes of purchases the Fed plans to make. The big news is the elimination of the mid-2015 time frame as policy guidance for the near zero percent interest-rate policy and replacing that with guidelines from economic indicators like unemployment, inflation, and long-term inflation expectations. But these are guidelines, not fixed thresholds that would trigger an immediate change in policy."
ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES INC., TOLEDO, OHIO:
"I think the most interesting aspect is the Fed stating they're going to keep interest rates depressed and try to keep stimulating the economy until employment is above a stated target. They see an anemic economy, and they're doing all they can to get any economic progress. I'm a little surprised they made such a long-term commitment."
QUINCY KROSBY, MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY:
"It's another round of easing. It is good for stocks and risk more generally. And they came out with an economic data point as a guideline. That's very important, because it helps the market anticipate an exit strategy. The markets had not expected this would necessarily happen at this meeting. It gives some certainty rather than having everything open-ended. The Fed doesn't have a good reputation when it comes to knowing when to exit, when to raise rates. Unfortunately, the downside is that it now turns everyone into an economist. But it should be good for portfolio management."
IRA JERSEY, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK:
"The (Chicago Fed President Charles) Evans rule was a little bit surprising this early. By having a relatively high unemployment threshold at 6.5 percent, it is really an unchanged policy stance. They are basically taking out the same amount of duration that they were in Twist, but they are buying less in the long-end than they had been before. They are buying less in 7s through bonds and buying some of the 5s, which they weren't doing before. People also think that when the Fed does QE that the economy is going to get better, so it's a steeper yield curve."
FRANK LESH, FUTURES ANALYST AND BROKER AT FUTUREPATH TRADING LLC IN CHICAGO:
"There is not much change and not much surprise in this announcement. A lot of this is as expected. The next thing is to wait for someone real to talk here ...we got that extra $45 billion."
ERIC STEIN, VICE PRESIDENT AND PORFOLIO MANAGER, EATON VANCE MANAGEMENT MANAGERS, BOSTON:
"It's a very dovish statement. I'm surprised they went with the threshold language right now. I thought they would wait until next year. They will continue the mortgage buying program and they are going to continue the buying part of Operation Twist without the selling. That is what most people expected. But the surprise is they basically replaced the mid-2015 reference point for near-zero interest rates with a 6.5 percent threshold for unemployment. You do see longer-term Treasuries selling off because that's somewhat inflationary. The dollar is weakening. Gold prices are up."
J.J. KINAHAN, CHIEF DERIVATIVES STRATEGIST, TD AMERITRADE, CHICAGO:
"The Fed basically didn't do anything that wasn't 'built in'. I think it was a smart move for them because you don't want to spook the market one way or another when the markets could easily get a jolt from any news regarding the fiscal cliff."
TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
"For the most part the Fed's announcement was as expected. The more explicit target of its threshold and how long they will policy will stay easy until is what is different and what stands out the most."
BRAD BECHTEL, MANAGING DIRECTOR, FAROS TRADING, STAMFORD, CONNECTICUT:
"The $45 billion number confirms what the market was looking for. It's additional QE, which should be risk-positive. Yields are backing up a bit, which should be supportive for dollar-yen. It underpins the equity market and, to me, is a nice framework for a risk rally that I would expect to carry over into the first quarter. The fiscal cliff is obviously a concern but if we get through that, it should be risk-positive."
JOSEPH TREVISANI, CHIEF MARKET STRATEGIST, WORLDWIDE MARKETS, WOODCLIFF LAKE, NEW JERSEY:
"In the Fed view the economy has deteriorated enough to warrant additional support measures. Considering the meager success of the past four years in fostering economic growth with asset purchases, the Fed finds itself in a policy box with no exit, unable to improve the economy but afraid to temper its stimulative policies for fear that the economy will collapse. This will have very little impact on the dollar as it is a continuation of current policies and has already been priced in."
STOCKS: U.S. stock indexes added to gains BONDS: U.S. bond prices declined, boosting yields FOREX: The dollar was little changed against the euro
(Americas Economics and Markets Desk; +1-646 223-6300)