FOMC Meeting: Risk-On!

The message from yesterday’s FOMC meeting is that the Fed has adopted an unambiguously aggressive dovish stance that should carry risk asset prices higher.

The Fed clearly exceeded financial market expetations.

T oday, the Fed announced that it will engage in open ended purchases of mortgage securities as well as extend the forward guidance to mid-2015.

In addition, the statement included:

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

In other words, the Fed will increase its rate of purchases if the employment market does not improve substantially. Also, the Fed did this at a time when long-term inflation expectations have been rising. This is quite different from QE2, and shows that Chairman Bernanke is willing to take risks with inflation expectations, which up to this point have been fairly well anchored. The Fed clearly exceeded financial markets’ expectations yesterday. Bernanke has sent a strong signal that ‘whatever it takes’ is not reserved for the ECB.

Bottom line: Yesterday’s actions will extend the life of the liquidity-driven rally in pro-cyclical investments.

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