The Fed did not change policy but that did succeed in changing expectations. It is clear that the Fed wanted to clarify their intentions when it comes to an exit strategy for bond buying and instead of moving closer to an exit strategy we may be moving further away.
The key to the FOMC was that it, "continues to see downside risks to the economic outlook” and also that "fiscal policy is restraining economic growth.” The committee also said it is "prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation “as prospects for the labor market and inflation change.”
Based on recent economic data like the disappointing ADP jobs report and the weak ISM manufacturing number, not to mention the weak energy demand numbers, it would mean that the Fed is going to be closer to a more aggressive policy than they were before the statement.
The Fed is making it clear that now the increase and decrease of bond purchases will be used the same way they used to influence the Fed funds rate, when we had a rate. In other words, with the Fed fund rates at negative in real terms to influence tightening or loosening in the netherworld they will use their buying and selling as a fiscal tool. If the data continues to disappoint, if the ECB can't rise to the occasion by lowering rates or if Washington fiscal policy brings us down or that darn black swan event, the Fed stands ready to juice the economy by increasing bond purchases. If data starts to look rosy, if inflation start to unexpectedly creep up, if the EU solves its debt woes or if Washington gets its house in order the Fed stands ready to back off said purchases. If the Fed used oil supplies as an indicator, they would be doubling their bond purchase now. The Energy Information Agency shocked the market by reporting that U.S. Crude supply increased by 6.7 million barrels putting supply at the highest level in 82 years. So much for that uptick in gasoline demand.
Is natural gas acting as a safe harbor commodity? Nat gas rallied touching near its multi-year high and sold off in what was almost like a double topping formation. Of course the natural gas was strongest as the U.S. data came out weak and sold off later as the Fed seemed to change the perception that the they were dead set on exiting extraordinary stimulus...The debate goes on. Still some say it is all about weather. Others say that if gas stays at these levels power generators will switchback to dirty coal. The debate goes on and we will continue to follow! In the meantime we still are hold to our prediction that we made early this year that natural gas prices will hit $7.00 by 2015 then find a new range between $7 and $8. Part of this is increased cost of production as well as increasing demand.