Today’s FOMC statement saw a few minor tweaks and alterations to the language regarding economic activity, employment, housing and inflation; however it was broadly in-line with market expectations (see changes below). As for the headlines, the FOMC decided to keep rates at 0-0.25% and will continue to purchase mortgage-back securities (MBS) at a pace of $40B a month. Furthermore, they decided to purchase longer-dated Treasuries at a pace of $45B per month (initially) once the Maturity Extension Program or “Operation Twist” expires at the end of the year (as highlighted in our December FOMC preview).

That said, the real surprise came when the FOMC decided to replace their calendar approach, whereby rates were scheduled to stay low until mid-2015, with numerical thresholds – To keep rates at low levels as long as the Unemployment rate remains above 6.5% & inflation is at 2.5% or less. Later in Bernanke’s press conference he stated that this new guidance doesn’t alter their mid-2015 rate outlook. This was backed up by the Economic Projections of the Federal Reserve Members & Presidents, which showed that the unemployment rate will not drop to 6.5% until 2015 & inflation is expected to remain below the key 2.5% level – Here’s the link from the Fed if you want to dig deeper into their projections: http://1.usa.gov/QVwedo.

The markets initially appeared enamored with this news, whereby equities & commodities rallied and U.S. treasuries & the dollar slumped, but once Bernanke started to speak this trend began to run out of steam. Presently, nearly all of these markets have completely retraced these moves (with exception to Treasuries), in what appears to be a classic ‘buy the rumor, sell the fact’ reaction. At minimum, this will make for interesting two-way trading over the next 48-hours.

Below you will find the December and October statement comparison, with omissions Strikethrough (in grey) and additions underlined (in blue). The remaining text in black has not changed from the prior statement.

Source: Federal Reserve, FOREX.com