THE TAKEAWAY:USD FEDERAL RESERVE RATE DECISION > 0.00% main rate, +$45B/month in QE (US Treasury purchases, unsterilized, like QE2) to replace Operation Twist, and “Evans Rule” – program will be reassessed when the Unemployment Rate drops below 6.5% or yearly CPI is higher than +2.5% > USDOLLAR BEARISH, EURUSD BULLISH
At its last policy statement of the year, the Federal Reserve announced that it would replace its maturities extension program (MEP) Operation Twist with another variation of quantitative easing that has been implemented before: an outright Treasury purchases program at the pace of $45 billion per month. With the sterilized QE finished, the Fed’s balance sheet is now on target to grow at a rate of $85B/month, which would bring the Fed’s balance sheet to a total size of over $4 trillion by 1Q’13; the monetary base with be approximately 5x-6x large in 2014 than it was in 2008.
But the Fed’s decision today did not stop there: what is being referred to as the “Evans Rule” was also implemented. Named after Chicago Fed President Charles Evans (an ultra dovish FOMC member), the Evans Rule stipulates that the stimuli will remain in place until the Unemployment Rate hits 6.5%, unless the rate of yearly inflation (as measured by the various CPIs) increases to over +2.5%; in both cases, the Fed’s plans would be reevaluated.
For the full release, Senior Currency Strategist John Kicklighter reviewed the FOMC statement and highlighted (in red) the notable points, which can be viewed here.
Following the release, the US Dollar fell across the board, including against the Japanese Yen, as investors started to price in diminished rates in the future. Perhaps the most notable mover was the EURUSD, which continued its rebound after sharp declines post-ECB last week. The EURUSD rallied up from 1.3050 minutes ahead of the release, trading to 1.3075 before a slight pullback, before resuming its rally towards 1.3100.