According to Fed, new MBS purchases will be continued, increased or combined with
additional easing programs should the labour market fail to improve “substantially”.
But here comes the question: How much should the labor market improve to be considered as improving 'substantially'?
Anyway, this mini-QE would appear to be marginally below market consensus regarding additional QE, and the extension of exceptionally low rates was broadly expected. What is of most interest about this move is the introduction of 'economic conditionality' to decide when it will end or even be enlarged. This means that we are likely to see continuously accommodative policy as the norm well into 2013 unless there is a sharp improvement in the labour market. We for now assume that “substantial improvement” will be interpreted as below 7% and falling for the official unemployment rate. This program is notably smaller than QE1, when purchases of between USD 95bn and USD 145bn were made, and QE2, which saw purchases of USD 75bn. However, the amount of purchases currently being made in the OT2 program could morph into further MBS or UST purchases should the recovery continue to be lackluster.
FOMC forecasts
The FOMC increased its central tendency forecasts for GDP in 2013 to 2.5-3.0% (2.2-2.8% previously) and for 2014 to 3.0-3.8% (3.0-3.5% prior), while shading the forecast for 2012 to 1.7-2.0% from 1.9-2.4%. It shows that they are expecting that their policy actions will be positive. There was a tightening of the range in the central tendency for unemployment in 2013 to 7.6-7.9% against 7.5-8.0% and no change in 2012 at 8.0-8.2%. There was more optimism about 2014, which is now expected to average at the bottom of the prior range of 6.7-7.3% against 7.0-7.7%. There was minor tweaking of the core PCE forecasts, but with the most drastic change being the lower bound of 2014 being raised, to 1.8-2.0% from 1.6-2.0%, there is clearly little inflation concern. Unemployment forecasts will become even more important when we know what unemployment level the FOMC is targeting.
But here comes the question: How much should the labor market improve to be considered as improving 'substantially'?
Anyway, this mini-QE would appear to be marginally below market consensus regarding additional QE, and the extension of exceptionally low rates was broadly expected. What is of most interest about this move is the introduction of 'economic conditionality' to decide when it will end or even be enlarged. This means that we are likely to see continuously accommodative policy as the norm well into 2013 unless there is a sharp improvement in the labour market. We for now assume that “substantial improvement” will be interpreted as below 7% and falling for the official unemployment rate. This program is notably smaller than QE1, when purchases of between USD 95bn and USD 145bn were made, and QE2, which saw purchases of USD 75bn. However, the amount of purchases currently being made in the OT2 program could morph into further MBS or UST purchases should the recovery continue to be lackluster.
FOMC forecasts
The FOMC increased its central tendency forecasts for GDP in 2013 to 2.5-3.0% (2.2-2.8% previously) and for 2014 to 3.0-3.8% (3.0-3.5% prior), while shading the forecast for 2012 to 1.7-2.0% from 1.9-2.4%. It shows that they are expecting that their policy actions will be positive. There was a tightening of the range in the central tendency for unemployment in 2013 to 7.6-7.9% against 7.5-8.0% and no change in 2012 at 8.0-8.2%. There was more optimism about 2014, which is now expected to average at the bottom of the prior range of 6.7-7.3% against 7.0-7.7%. There was minor tweaking of the core PCE forecasts, but with the most drastic change being the lower bound of 2014 being raised, to 1.8-2.0% from 1.6-2.0%, there is clearly little inflation concern. Unemployment forecasts will become even more important when we know what unemployment level the FOMC is targeting.
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