FOMC follow-up

It didn’t take long for a narrative to emerge in the aftermath of the FOMC statement: the Fed is preparing to pursue fresh QE measures soon in spite of not having done so this time round.

The market seems to agree with this, with the S&P 500 spiking immediately after the announcement before starting to trend downward again:

Zero Hedge adds that precious metals are getting an even more favorable response than equities, which is also consistent with expectations for QE2.

What’s interesting is how the Fed chose to signal its intent. As we noted, the language around economic activity was virtually unchanged from the August statement. Instead, the Fed stated a commitment to bolstering inflation from its current levels.

Bernanke said at Jackson Hole that “if deflation risks were to increase, the benefit-cost trade offs of some of our policy tools could become significantly more favorable.” So perhaps the change in language indicates that the risks are indeed higher, and therefore a need to do more.

So all the commentators who have recently called for a new inflation target higher than 2 per cent won’t quite get their wish — but Bernanke seems to be saying that at least he’ll do what is needed to hit the one he has now.

Related links:
FOMC statement – FT Alphaville
Staying on target – FT Alphaville

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