The Fed is so over QE

The Fed announced the end of QE3, and amended its statement. The changes are, however, rather balanced with dovish lines on the one hand and hawkish ones on the other hand. Financial markets focus on the latter, as illustrated by resuming appreciation of the dollar, which will help maintain inflation low, with a chance of postponing the first rate hike…

• With no big surprise, FOMC members decided on the very last taper, ending the third wave of quantitative easing (QE3). As from October 31 st , the Fed will stop enlarging its balance sheet. It will, however, not stop buying Treasuries and MBS as it will continue its “ existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage - backed securities in agency mortgage - backed securities and of rolling over maturing Treasury securities at auction ” .
  
• Today ’ s decision was not unanimous, but surprisingly, neither Richard W. Fisher ( President of the Federal Reserve Bank of Dallas ) nor Charles I. Plosser ( Philadelphia ) opposed . They did last time, being uncomfortable with the commitment of the Fed to easy policy for “ a considerable time after the asset purchase program ends ” . On the other hand, the extra - dove Narayana Kocherlakota (Minneapolis) opposed both the exit from QE3 and the lack of commitment of the Fed to returning inflation back to its target.
  
• To financial markets this sounded hawkish, and the dollar came back on a steep appreciation trend. Admittedly , if the hawks agree and the dove disagree s, this could means the general mood is shifting on the hawkish side . Some pieces of the statement also sound more hawkish: the underutilisation of labour resources is said to be gradually diminishing , while it is noted that were economic developments surprise on the upside “ then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated ” .
  
• Still, the “ considerable time ” (separating the first rate hike from the end of QE3) remains in the statement . While it is also noted that disappointing economic developments would lead the Fed to postpone the first rate hike. Finally, the Committee acknowledges the recent fall in inflation expectations.
  
• What if the hawks turned less dovish and recognise that there is a handful of uncertainties about the future developments in wages and prices?