Market Overview

Fed Slams Dollar With Interest Rate Promise


On Wednesday, the Federal Reserve did something historic: they released guidance.

In the Fed's January statement, the FOMC kept rates at 0.25%—a move that was widely anticipated. In August of 2011, the Fed announced that it would keep rates near zero until mid 2013. The Fed revised that on Wednesday, pushing the date out until 2014.

Yet, what may have been more interesting to investors was the Fed's guidance for future policy.

The Fed revised its outlook for future US growth lower, dropping its expectations for GDP growth to 2.8-3.2%. The Fed had seen growth of 3-3.5% previously.

The Fed forecast the inflation rate at 1.5-2% for 2012.

For employment, the Fed believed that the jobless rate would come down, although at a slower pace. The Fed expected unemployment to decline to 6.7-7.6% in 2014.

In his subsequent press conference, Chairman Ben Bernanke stated that, while unemployment targeting was largely impossible, the Fed could get a sense for what the natural rate of unemployment was, and could then use policy to go from there. Bernanke stated that the current rate of unemployment was unnaturally high and that there remained room for the Fed to continue to address the problem of unemployment.

The markets reacted positively to the Fed's statement, as US equity markets moved much higher. US equities had been trading in the red during the early part of the session, but reversed and moved into positive territory after the Fed released its statement.

Precious metals reacted most strongly, as gold broke back above $1700 an ounce and silver rallied above $33.

The US dollar index also reversed course, selling off hard and dropping below the key $80 level.

PIMCO's Bill Gross—the man who runs the world's largest bond fund—stated that the move was particularly dovish, and that it amounted to a "QE 2.5." He later tweeted that QE 3, 4, and 5 would be forthcoming as the Fed continued to squeeze savers around the country.

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