ANZ Morning Brief: This morning was all about the US Federal Reserve and it duly delivered.

GLOBAL MARKETS:  This morning was all about the US Federal Reserve and it duly delivered. The big change was a shift in the Fed’s communication strategy for it’s zero-interest rate policy, which is now dependent on the US unemployment rate falling below 6.5% (while inflation remains below 2.5%); from the Fed’s earlier mid-2015 forward guidance. The Fed also announced it would roll the $45bn of monthly Treasury purchases from an expiring Operation Twist into QE. The statement was dovish on the whole, and while positive for risk assets in the near term we expect global bond yields to remain capped in the longer term. This was borne out in a 0.5% spike in US equities and further gains to NZD and other risk currencies. US 10 yr yields initially rose 3bps to 1.69% and the curve steepened.  Earlier, Italian equities recovered the remainder of Monday’s post-Monti-resignation plunge, rising 1.1% to be back to Friday’s level, the Euro Stoxx closing up 0.2% despite weaker EZ Industrial Production data. European peripheral 10yr bond yields also rallied with Italy -8bps, Spain and Portugal -9bps. Buoyed by the Fed announcement, the NZD/USD posted 10-month highs of 0.8450 and the TWI hit five year-highs of 75.2. Commodities were higher with crude rising 1.7% supported by USD weakness.

FED ADOPTS INFLATION AND UNEMPLOYMENT THRESHOLDS FOR RATE GUIDANCE? This change in approach was a little earlier than expected by markets. Specially, the Fed changed its forward guidance on it’s zero-rate policy from a time-dependent state (previously through to mid-2015) to one based on economic thresholds. The Fed will now maintain its zero-rate policy as long as the unemployment rate remains above 6.5% while inflation is projected to be no more than 2.5% (this is some way from the current US unemployment rate of 7.7%). The US$45bn in monthly US Treasury purchases from a soon-to-expire Operation Twist will be rolled into QE (although this figure was at the upper-end of market expectations). Importantly, the FOMC expects “that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens”. There were little apparent changes to the Fed’s assessment of the economic outlook.

CURRENCY: The trend of positivity continues with the FOMC decision to adopt economic targets for rates guidance surprising markets and sending USD lower across the board.