Forex Flash: Will Fed extend QE into 2014? – UBS

FXstreet.com (Barcelona) - According to the UBS Research Team, “The key risk to our bullish dollar view is if the Federal Reserve decides to prolong its current round of quantitative easing into 2014.” Yesterday, the Federal Open Market Committee agreed to continue buying $85bn a month of Treasuries and mortgage-backed securities.

Interestingly however, it noted that ‘fiscal policy is restraining economic growth’ and said it was ‘prepared to increase or reduce the pace of purchases…as the outlook for the labor market or inflation changes.’

Clearly, the Fed has become more concerned about the impact of March’s budgetary cuts and the slowdown in inflation. Core Private Consumption Expenditure prices – the Fed’s target measure of inflation - are now rising by only 1.1%y/y, well below the 2.5%y/y threshold at which the Fed will consider hiking rates. But for now the FOMC has decided to keep its options open rather than taking a more dovish tilt towards increased monthly asset purchases.