BofA Merrill Lynch Global Research – A Global Economics Rates & FX Report – Wednesday, 12 December 2012
Once more, with feeling
The FOMC statement was modestly more dovish than we or the markets had expected. The FOMC announced $45bn in outright Treasury purchases and a continuation of $40bn in MBS purchases, largely as expected. The surprise came from the decision to replace the calendar commitment with economic thresholds for rate guidance, putting an emphasis on the unemployment rate over current inflation. The Fed also made it clear that there is a difference between the rationale for doing more QE versus hiking interest rates. The Fed is engaging in QE to increase near-term momentum in the economy, while the rate guidance is to provide information about future conditions. We expect the Fed to continue with QE through most of 2014, expanding its balance sheet by another $2tr. As the FOMC noted, rate hikes will not begin for a “considerable time” after QE ends; we expect the first rate hike in late-2015.
Read the full report here.