Forex Flash: Fed easing program to extend well into 2013 - Standard Chartered

Share | (Barcelona) - The Fed decided to err on the aggressively dovish side, say David Semmens and David Mann, strategist at Standard Chartered, after a fresh round of stimulus and threats of more to come if the labour market does not improve. "This is a clear sign that the FOMC is comfortable with the inflation risks of its action and is very frustrated with the slow decline in the jobless rate" the analysts note.

As a reminder of today's Fed decision, it will buy USD 40bn of Mortgage Backed Securities (MBS) in addition to the USD 45bn worth of US Treasuries ( UST ) under Operation Twist currently being conducted each month between now and year-end.

According to Mr. Semmens and Mr. Mann, on its own, "this round of quantitative easing (QE3) appears to be a smaller version of QE1 and QE2. However, the new MBS purchases will be continued, increased or combined with additional easing programs should the labour market fail to improve "substantially". This is a very dovish departure from previous rounds of QE, giving no particular expiry date."

"What is of most interest about this move is the introduction of 'economic conditionality' to decide when it will end or even be enlarged. This means that we are likely to see continuously accommodative policy as the norm well into 2013 unless there is a sharp improvement in the labour market. We for now assume that 'substantial improvement' will be interpreted as below 7% and falling for the official unemployment rate" Standard Chartered analysts conclude.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

Referenced Stocks: UST

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