Fed To Continue Mortgage-Backed Securities Purchases

FOMC statement contained few changes and caused limited market reaction.

We have a interesting day ahead of us with focus on the Riksbank meeting, UK Q3 GDP, euro area M3 growth and US durable goods.

Markets Overnight
As expected, there were virtually no changes to the October FOMC statement. The Fed will continue to purchase USD 40bn in mortgage-backed securities each month and continue the current "twist" programme. The Fed reiterated that it will proceed with its asset purchases and potentially scale these up until the labour market improves substantially.

The description of household spending was upped slightly, stating that consumption has advanced a bit more quickly but this was countered by downgrade in the language of business fixed investments. Although there were no indications in the statement that the Fed is moving closer to an Evans rule, we nevertheless think that this will be the next step from the FOMC. The biggest obstacle is to find consensus within the FOMC on the relevant variables to target and the thresholds that would trigger a fed funds rate hike.

The main challenge lies in the variable that captures the state of the labour market. We think the Fed will eventually use some sort of adjusted unemployment rate, which takes into account both developments in the labour force and unemployment as target. This is a work in progress and we expect it to take some time before the FOMC is ready to announce its new rule. The release prompted very limited market reaction, see also FOMC meeting: a non-event, 24 October.

Despite the release of lower-than-expected leading indicators in Europe yesterday, markets shook off the negative sentiment from the early hours, see PMI and Ifo continue to signal recession, 24 October. The positive sentiment carried over to the US stock market supported by improving new home sales. Despite this S&P 500 closed down by 0.3%, after a sell-off in the final hour.

Asian stock markets are trading with no clear direction this morning. In the US bond market yields on longer matured Treasuries increased a bit after the FOMC meeting, with the 10-year yield trading just below 1.80% this morning. In the FX market EUR/USD is this morning trading at 1.298.

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