Federal Reserve 'tweaks' QE guidance to easier for longer

The Federal Reserve 'tweaked' its guidance for asset purchases on Thursday night, from time-based to outcome-based.

According to some economists, that appeared to suggest that the US central bank was open to maintaining its current easy policy for longer.

Up until Thursday's meeting, the Fed had only been willing to assure that it would keep buying assets at a pace of $120bn a month "over coming months".

Now however, the Federal Open Market Committee, said QE would be kept at its current clip "until substantial further progress has been made toward the [FOMC's] maximum employment and price stability goals".

"In isolation, that change in language indicates that the purchases could continue for longer than previously believed," said Paul Ashworth, chief US economist at Capital Economics.

"But "substantial progress" is still a suitably vague term and this change was well flagged in the minutes from the last FOMC meeting, which perhaps explains why the 10-year Treasury yield is up post-announcement."

As of 1938 GMT, the yield on the 10-year US Treasury note was up by two basis points at 0.94% and that on the policy-sensitive two-year note was roughly flat at 0.13%.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, was more critical, telling clients: "We had hoped that the Fed would increase the weighted average maturity of its Treasury purchases, given the upward trend in 10-year yields and the damage wrought by the Covid third wave."

For his part, Ashworth did express "surprise" at the largely unchanged policy statement from the Fed versus its last meeting, despite the recent resurgence in coronavirus infections and their impact.

Perhaps due to such views in the market, in his post-meeting press conference, Fed chairman, Jerome Powell said central bank officials believed they had overestimated how hard the economy would be hit by the pandemic.

Nevertheless, in later remarks, Powell reiterated that the Fed was ready to use all tools at its disposal as required.

On asset prices, Powell said they were "a little high" but overall the picture was mixed and not one of red flags everywhere.

He also said high price-to-earnings multiples for stocks were not out of whack given expectations for long-term rates staying lower for longer and that public debt-to-GDP dynamics were in fact on a stable footing.

-- More to follow --