For the first time in modern history, the Fed’s policymaking committee has announced an unemployment rate ‘threshold’—established at 6½% or lower. This is exactly what the Chicago Federal Reserve Bank President Charles Evans has been calling for and assures the markets that the Fed really will not change the fed funds rate target from 0 to ¼ percent at least as long as the jobless rate remains above 6½%, barring a meaningful rise in their forecast for inflation over a one-to-two year timeframe to more than 2½%, and longer-term inflation expectations remain well anchored. This is as aggressive as Fed easing has ever been and long-term Treasury yields have responded by rising. Some might suggest that this reflects inflation fear, but also likely, it reflects the market’s view that the Fed means business and the economy will recover more rapidly than previously thought. As usual, there was one dissenter, Jeffrey Lacker—President of the Richmond Fed—who continued to “oppose the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate”. For Fed watchers, this is a huge development, specifically linking interest rates to the level of unemployment. This is an historical move in monetary policy innovation. This breaks with the tradition of the Bank of Canada, the Bank of England, the ECB and others in moving from inflation targeting alone to real-side targeting as well. In addition, the Fed also announced a beefed up asset purchase program to $85 billion monthly with the end of Operation Twist, which was pretty much as expected. The Fed will increase its quantitative easing by buying $45 billion a month of Treasury securities, in addition to $40 billion a month of mortgage-backed securities, until there is a substantial improvement in the labour market. Bottom Line: Although the Fed did not mention the fiscal cliff or austerity issues in their press release, they are clearly very concerned about the state of the U.S. economy. Evans has been quoted as saying that what keeps him up at night is the prospect of the U.S. falling into a Japan-like long-term period of weakness. Not surprisingly, gold and the stock market rallied on the news, but these are early days yet. The Fed has an open-ended commitment to pump liquidity into the U.S. economy for as long as it takes to see unemployment fall below 6½% (barring a serious uptick in inflation forecasts).