Market Overview

Fed Announces QE4: Stocks and Commodities Rise After FOMC Statement

On Wednesday, the Federal Reserve released its FOMC statement from its December meeting Once again, the central bank struck a dovish tone, sending stocks and commodities higher on the day. The statement said that the Federal Reserve will hold interest rates at exceptionally low levels as long as the unemployment rate is above 6.5 percent and the inflation rate does not trend higher than 2.5 percent.

The central bank also announced a new round of quantitative easing to coincide with the expiration of "Operation Twist," at the end of the year. Under the program, the central bank will continue to purchase $45 billion per month in long-dated Treasury bonds as it didin Operation Twist, but the purchases will not be offset by the sale of shorter-term maturities.

The statement noted that there continues to be modest improvement in the economy, unemployment, and the housing market, but that growth in business investment has slowed and that inflation is running "somewhat" below the FOMC Committee's longer-run objective. The Fed maintains that longer-term inflation expectations have remained stable.

Against this economic backdrop, the statement says that "The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions." Ominously, the statement also notes that "strains in global financial markets continue to pose significant downside risks to the economic outlook."

The Fed will continue to purchase mortgage-backed securities at a rate of $40 billion per month and will also continue to purchase $45 billion in long-dated Treasuries per month. The Committee's policy of reinvesting principal payments from from its holdings of agency debt and agency mortgage-backed securities back into agency mortgage-backed securities will remain in effect. The likely result of these actions according to the central bank is downward pressure on longer-term interest rates, support for mortgage markets, and more accommodative financial conditions.

The most significant portion of the statement was the quantitative easing thresholds that the Fed has now adopted. The new language states that "the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

Essentially, the Federal Reserve is now adopting a stance of open-ended ZIRP interest rate policy. The only dissenting member of the FOMC Committee with regards to the monetary policy action was Jeffrey Lacker, "who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate."

In the wake of the statement, risk markets are reacting mildly positive. Stocks have risen in the wake of the FOMC release and at last check the Dow was up around 75 points to 13,323. The S&P 500 had added roughly 0.70 percent and the Nasdaq was up 0.31 percent. Prior to the Fed statement, the major averages were trading around the flatline.

Commodity markets are also moving slightly higher, with crude oil trading up 1.56 percent to $87.15 and gold futures adding 0.44 percent to $1,717. As stocks and commodities rise, Treasuries have fallen sharply. At last check, the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) was down almost 1 percent to $122.85.

The full FOMC statement is below.

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In 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.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

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