Fed 8217 s Unemployment Targeting

The Fed’s decision to announce more QE with +45 bn in US Treasuries, while maintaining the $40 bn in monthly purchases of MBS was expected but the statement carries a more aggressive expression that quantitative easing shall remain guided primarily by unemployment. The policy statement highlights the Fed’s implicit unemployment targeting by stating that rates would stay low for “at least as long” as the unemployment rate remains above 6.5%.

Shifting from a calendar-based reference to a data point target intensifies markets’ reaction function to the evolving releases, but will also likely revert trading to interpret good data as potentially negative on the rationalisation that improved jobs figures reduce the need for fresh stimulus.

The Fed announces more QE with +45 bn in US Treasuries, while maintaining the $40 bn in monthly purchases of mortgage-backed securities while continuing to reinvest the proceeds. The Fed noted an improving economy but added unemployment remained elevated.

Fed Sets Direction, BoJ Sets the Vehicle

As the Fed sets direction on policy rates for the rest of central banks and equity markets, the Bank of Japan sets the currency vehicle, by stepping up asset purchases and driving down the yen once LDP Chief Abe becomes the likely PM at Sunday’s elections.

The result would likely be a re-invigoration of the yen carry trade, implying 112 for EUR/JPY, 140 for GBP/JPY as the pair crosses its 200-week moving average for the first time since 08/08/2008. USD/JPY remains on track for 85.20, while CAD/JPY and AUD/JPY targets 87.07 and 90.10 respectively.

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