The better than expected Jan employment data placed the unemployment rate at 8.3% — exactly the middle of the 8.2% to 8.5% range that FOMC participants forecast for Q4’12, at their recently concluded Jan meeting.
If data maintains this tone, the fed’s next move will be to upgrade their inflation forecast. It follows that QE3 will move off the Fed’s current agenda (as their inflation forecast will likely be around their 2% target). The zero lower bound remains binding, so it seems likely that the zero rates to 2014 pledge will remain in place at least through the first round of forecast upgrades.
It is not just me making these points – the WSJ’s ace Fed watcher, Jon Hilsenrath, wrote that
A few more months of strong jobs reports like the one released Friday, and the Federal Reserve might need to draw up a new game plan. For now, though, Fed Chairman Ben Bernanke seems unlikely to rewrite his script for the central bank.
The market will not wait a few months before revising its forecasts. It started right after the jobs report. In the US Treasury market, 30yr bonds sold off 12bps, anad 5*30 steepened 6bps.
The most interesting price action was in the EURUSD – previously, it had rallied on strong US data, but (following an initial gap up) it struggled to hold a bid into the NY close. My guess is that folks are reasoning that without QE3 the USD will strengthen.