The Federal Reserve announced on Wednesday it will now base its actions on changes in the unemployment rate, rather than tie it to a calendar framework, as long as inflation remains low.
The Fed said it will continue purchasing longer-term securities until the unemployment rate improves to at least 6.5% or lower.
The Federal Open Market Committee decided to keep the federal funds rate at zero to 0.25% as long the jobless rate remains above 6.5% and inflation remains no more than 50 basis points above the committee's 2% long range goal.
The committee's decision to continue the purchasing part of Operation Twist by buying $45 billion in Treasury securities each month, along with continued quantitative easing through $40 billion in mortgage-backed securities purchases each month, “is definitely a more aggressive policy action,” which “means that people who would be buying them need to find another home. … We've been very positive on corporate assets and negative on Treasury securities because the yields are so low,” Ken Volpert, principal and head of taxable bonds at Vanguard Group, said in an interview.
Gary Madich, global fixed-income chief investment officer for J.P. Morgan Asset Management (JPM)'s global fixed-income group has been preparing his clients for the shift. “I think the evolution was something they needed to do, away from rather weak calendar-based guidance.”
Mr. Madich said the change allows Federal Reserve officials to have more direct impact, “particularly on short-term rates.”
But switching from a calendar-based policy framework to specific thresholds like unemployment rates “is going to introduce volatility into the market,” said Robert Tipp, managing director and chief investment strategist for Prudential Fixed Income. “Effectively, the Fed has pulled forward the window of timing under which they may be hiking rates or tightening policy. As the economic data comes out now, the market is going to extrapolate those short-term fluctuations. It could create opportunities, but there is a possible impact as well.”