The market’s focus has shifted to the two-day FOMC meeting that begins today. The Federal Reserve should be pleased with recent developments. Labor market slack continues to be absorbed. Core inflation measures continue to edge higher.  

Market-based measures of inflation expectations have risen,and the 10-year breakeven is a little above levels that prevailed before the December FOMC meeting. The volatility in the capital markets that characterized the first six weeks of the year has quieted. Domestic US economic activity has improved, and after a disappointing Q4 15, the economy has returned toward trend growth of around 2% here in Q1 16.  

The dollar would typically sell-off in anticipation of QE and then rally on the fact. However, euro’s rally that started in the middle of Draghi’s press conference last week was particularly striking and has helped fuel talk of the exhaustion of monetary policy effectiveness. 

There were numerous moving parts in the ECB announcement of a flurry of measures. If the markets were disappointed with the steps announced at the end of last year (10 bp cut in the deposit rate and extension of the asset purchases for another six months to March 2017), by nearly all reckoning the ECB got ahead of the curve of expectations last week. 

Many have focused on the 33% increase in asset purchases (to 80 bln euros a month) and the interest rate cuts, with the deposit rate now minus 40 bp, and the lending and refi rate were cut by five bp to 25 bp and zero respectively. Perhaps because they are more complicated, and the full details are not yet available, but the ECB’s innovative measures have not received the attention we think they deserve. 

There had been concern that the ECB would exhaust some assets, particularly German assets, that it could buy under the bond purchase program. The ECB announced that it included senior investment grade debt of non-financial eurozone businesses in its asset purchase program. The full details have not been announced. For example, the precise definition of “non-financial” must be specified.  What other criteria will be used? Will there be limits based on the float and daily volume?