After a long period of growing anticipation from economists, markets, and a population increasingly concerned that the recovery is stuttering (voiced decisively in the results of the US mid-term elections) the Fed finally fired the restart gun on QE2 after the original round of asset purchasing proved to be a false start of sorts. The result of the FOMC was that the Fed will purchase US$600bn of longer-term Treasury securities (with an average duration of 5-6 years) by the end of Q2, 2011. The net new purchases, at $75bn per month, may only be a starter, but are at the low end of what markets were expecting ($70bn to $100bn per month over 5 or 6 months amounting to something in the order of $500bn). To the same end the 5 to 6-month duration is shorter than markets had on balance been expecting. The statement said the FOMC would regularly review the pace of its securities purchases and the overall size of the asset purchase program in light of incoming information, and will adjust the program as needed to best foster maximum employment and price stability.
Today’s statement represents what may be just the start of an uncertain process. No one knows today to what extent this policy may need to be extended (or cut back). The FOMC’s phraseology on getting inflation back to levels consistent with its mandate was sufficiently moderate enough not to really scare the horses in the FX market and completely pummel the USD, as was the fear. Indeed, most of the volatility involving the Dollar appears to have been prior to, rather than after, the event. As a summary, this is about as balanced a conclusion to the event as could have been. With the added complication of another G20 meeting this weekend, the US government will be again keen to avert the growing accusation of competitive currency devaluation by their international counterparts. Nonetheless, the US dollar fell sharply immediately following the announcement but then recovered and pursued a more orderly decline. Sterling and the Euro are at highs against the Dollar not seen since the start of January.
Following the FOMC decision, we get announcements from the Bank of England and ECB today. The ECB decision has the lowest event risk around it, with the Governing Council almost certain to keep the refi rate at 1.0%, though Trichet’s thoughts at the Press Conference on the Bank’s planned withdraw of special liquidity measures will come in for scrutiny. The Bank of England decision is now widely expected to be for an unchanged policy rate and no change in the level of QE, given macro-outcomes over the last quarter that aren’t too bad. But there remains an outside chance of a surprise should MPC members be scrutinising a set of inflation forecasts for the November Inflation Report that look markedly lower.