Forex Flash: Yesterday’s FOMC 18 months in the making? – UBS

With the Fed, it really is about keeping the peace, and they did so by deciding outright around 18 months ago that extending stimulus expectations as far out into the future as possible would be the best approach – calendar guidance was first adopted, before being dropped in favor of numerical targets.

“When it became clear towards mid 2011 that the US economy would not be ready for stimulus, and in Q3 of that year, dissatisfaction over the use of calendar dates was already starting to show up in the minutes. The market knew that this could only mean stimulus guidance was going to be extended even further, and there was a massive collapse in the absolute level of forward rate expectations, but also the dispersion of the same.” notes Research Analyst Garth Berry at UBS. In the January 2012 FOMC meeting, the Fed moved towards targeting 'longer-run goals' to anchor policy, and this 'compressed' policy expectations further, to the extent that the market seemed to have stop caring about what the Fed would do, and the Eurozone's various developments became the main market driver.

However, it is interesting to note that in addition to the January 2012 statement on long-run goals, the FOMC commented that 'it would not be appropriate to specify a fixed goal for employment' because of uncertainty over what levels were appropriate to target. Even so, the realization steadily dawned through the year that there was a need to 'compress' expectations even more to generate 'total certainty' in the medium and long-term on policy, and 'fixed goals' were adopted.