Fed More Dovish Than Expected, Points To Asset Purchases “Before Long”

From Win Thin

FOMC minutes from September 21 meeting was surprisingly dovish.  FOMC members thought that additional accommodation may be “appropriate before long” and seemed to lower the bar for further action.  During his Jackson Hole speech, Bernanke implied that the Fed stood ready to act again but that significant deterioration in the economic outlook was needed before further measures would be seen.  At the September meeting, though, “many” FOMC members felt that if growth remained too slow to reduce unemployment or if inflation continued to come in below target, then the Fed had grounds to take action again. “Some” felt that action would be warranted only if the outlook worsened and the odds of deflation increased materially, but they appear to be in the minority as other members lowered the bar for such action.  FOMC focused on asset purchases as the most likely tool to use, though it also discussed the possibility of targeting nominal GDP as well.  We note that FOMC did question the efficacy of another round of asset purchases, but in our view, this has turned into a non-issue as the Fed probably sees little downside to taking that extra step in trying to boost the growth trajectory.

Dollar correction appears to be over with the FOMC news, with the euro up about a cent after the release and back on track to retest 1.40.  QE2 has been fully priced in, and the FOMC more dovish only cements that fact.  Intra-meeting would seem panicky and so the Fed will most likely wait until a regular meeting.  Next FOMC meeting is November 3, and market will be looking for a policy shift then.