In attempts to support higher labor market employment, and keep longer term interest rates down, the Federal Reserve elected to “keep the target range for the federal funds rate at 0 to 0.25 percent”, with the current range of interest rates being seen as widely “appropriate”.
The measure was further reinforced by the announcement that central bankers were adding to current monetary stimulus, as the bank’s Operation Twist, which was extended since June 2012, will come to end in the next couple weeks. To this end, and adhering to market expectations, the central bank will commit to purchasing $45 billion in Treasuries a month. The measure will run simultaneously to already previous commitments of $40 billion in mortgage bonds per month made this September.
The new purchases are expected to inflate the current Federal Reserve balance sheet by $1.1 trillion, supportive of a $4 trillion debt load for the monetary body.
However, in a surprise announcement, policymakers noted the addition of a benchmark when it came to future monetary policy decisions. Central bankers will now be specifically tying monetary policy decisions to target rates in both inflation and unemployment.
Specifically, rates will be kept at exceptionally low levels “at least as long as the unemployment rate remains above 6.5%” and “inflation between one and two years ahead is projected to be no more than half percentage point” above the FOMC’s 2% target – or simply above 2.5%.
Seemingly, this move was made in an effort to become more transparent with markets, allowing for hard evidence of a recovery to surface before any type of monetary policy adjustment is to be made.
Today’s decision shouldn’t really come as a surprise to investors, as expectations were high that the Fed would ultimately side with more stimulus as the economy hasn’t really improved since their last meeting. However, today’s release does show a Federal Reserve that is coming to the end of its rope of monetary options. This will likely weigh on the US dollar in the coming sessions, adding to already established speculation of further greenback debasement.
The announcement has allowed the EURUSD to vault higher through 1.3050 resistance, en route towards 1.3100. A subsequent break above the 1.3100 would open scope for an advance on the 1.3171 September 17th swing high. Any near term correction would be held at bay by the 1.3052 short term fib support.
Source: FXTrek Intellicharts