Fed may yet need more policy tricks

If the experiences of the Bank of Canada and Bank of Japan are anything to go by, the Fed's pledge to keep rates low "at least through mid-2013" supports our new forecast that 10 year Treasury yields will fall to 2% by year-end (compared with our previous long-standing forecast of 2.5%).

But since the markets pretty much already expected rates to be close to zero by June 2013, the Fed's new policy is unlikely to boost the economy much. As such, more policy stimulus will probably be required and the Fed has a number of tools it could yet deploy. That said, assuming further sharp falls in equity prices don't accelerate events, the unusual division at the Fed and the temporary rebound in core inflation mean that more policy stimulus is unlikely until 2012.