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.
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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)