Equity markets have been rallying following the release of the latest FOMC communique which proved to be more dovish than was originally expected. The directive was closely watched by markets as it would include the first ever release by the Fed of its projected interest rate. In addition, a change of members that promised to reflect a more dovish tone would also set a potential change of direction.Finally, an update to the November economic projections for GDP, inflation, and unemployment would also be released.

The release of the interest rate forecast caused a stir as it suggested that policy would remain highly accommodative through late 2014. This led to a change in the Fed statement that the committee would keep rates at exceptionally low levels through that period. This replaced the mid-2013 language that had been present in the last couple of statements. The immediate effect caused investors to move out of the dollar and into riskier assets thus driving equities and causing the greenback to slip to a six week low. The divergence in Fed members outlook for rates in 2014 is notable as it stretched from the 0.25% level (6 members) to 2.75% (one member, three had it at 2.50%). So, while the exceptionally low language is in place, it does not necessarily suggest that the Fed would not move to hike rates until then.

The statement itself was a relative carbon copy of the December release with the mid-2013 language being the notable exception. There was some expectations that the Fed would upgrade its language on the economy. It did repeat its stance that the economy is 'expanding moderately'. But it actually lowered its outlook slightly by making a small tweak in the language, replacing 'modest' with 'moderate' which is viewed as a downgrade in Fed speak. In addition it cut its GDP outlook for 2012 and 2013 (see table below). The drop in the GDP outlook was not a surprise but there was certainly hope that the Fed would view the recent run of better than expected economic data as more of a positive.

On the employment front, the Fed kept its language steady noting there was indication of some improvement in the jobs market but unemployment remains elevated. The recent jobs data though did cause the Fed to lower its Unemployment Rate Outlook for 2012-14. In his press conference yesterday afternoon, Fed Chairman Ben Bernanke put Unemployment as the top interest of the Fed. Mr. Bernanke noted that the Fed would be able to handle inflation rates that ran above its target if it meant jobs improvement in the U.S.. This has put employment data at the top of the list for market participants to follow.

For inflation, the Fed showed signs that it was not concerned with pricing pressures at this time. In fact, the Fed dropped the 'pay close attention' language to inflation, leaving the statement that prices remain subdued as its nod toward the subject. It also slightly lowered its inflation forecasts for 2012-14 in its economic projects update.

Housing language remained the same which was a disappointment as some felt this was one area where the Fed could note an improvement. However, it kept the language that 'housing levels remain depressed' as its primary view.

The overall reaction to the statement, and Fed Chairman Ben Bernanke's press conference, was that the Fed remained very dovish and was prepared to embark on QE 3 as soon as the markets or global economy came under heavy pressure. The Fed did not provide details on how it would exactly go about another round of QE 3 but the general thought is that it would look to purchase MBS in the range of $500-600 bln.