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How Significant Are the Fed’s Targets?

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The Federal Reserve's pledge on Wednesday to continue its easing bias may have broadly met expectations, but its historic move to set numerical targets took many by surprise.

U.S. stocks wiped out gains in choppy trading after the U.S. central bank made the unprecedented announcement of keeping interest rates suppressed until unemployment falls below 6.5 percent and inflation tops 2.5 percent. In addition, the Fed said it would continue monthly purchases of $85 billion in Treasury securities and mortgage-backed securities until job market conditions improved.

(Read more: Fed Sets Target for Rates )

On the outset, the Fed's unorthodox move appears to be its latest salvo to battle the economy's erratic and sub-par recovery. But some market watchers say: don't read too much into it.

According to Greg Gibbs, senior FX strategist at RBS, the numerical targets aren't all that aggressive as the central bank had already alluded to them since last year.

"These threshold figures are consistent with the economic forecasts and rate guidance that have been in the Fed's quarterly economic projections since last year," Gibbs said.

(Read more: El-Erian: Why Markets Shrugged Fed's Historic Move)

In fact, Gibbs argues that the thresholds are "a bit less" dovish than expected, noting that the Fed's longer term "central tendency" for unemployment has been 5.2-6 percent, so 6.5 percent is above the upper end of this range.

"Some Fed governors have expressed a preparedness to see short term inflation as high as 3 percent to more closely meet the full employment target," he said.

Andrew Wilkinson, chief economic strategist at Miller Tabak, added, "while few expected the Fed to move this quickly on adopting official targets for inflation and unemployment, the premise had been floated earlier this year and so while the timing is surprising, the advance in tying these variables to the mast is not."

However, some market watchers including Rob Aspin, head of equity investment strategy, Standard Chartered Bank, who calls the Fed's shift in policy a "historic move", believe it will have a significant implication for markets.

"In the last 17 years, I've never heard of a major bank focusing primarily on employment targets. The 6.5 percent target - that is quite a way off. Investors will be focusing on employment data as it comes out, so there could be an increase in volatility around those periods," he said.

Bond Market Volatility

Michael Yoshikami said the Fed's targeting should not be taken lightly, particularly for fixed-income investors.

Bond investors are very uneasy right now, Yoshikami said, because Chairman Bernanke has outlined a scenario where quantitative easing will end if certain data statistics are hit. "I think that is a sobering prospective for people that are piling into fixed income," he told CNBC.

"You saw what happened on the bond market after this announcement came out today, it actually sold off. So what that means is, before unemployment rate gets to 6.5 percent, when it gets to 7.3, or 7.2 or 6.99, the bond market is going to sell off then as well," he added

(Read more: Why the Rush to Fixed Income May Be Dangerous)

Treasury prices, which move in the opposite direction to yields, fell following the Fed's policy announcement, with thirty-year bonds dropping 1-06/32 in price to yield 2.901 percent, up from 2.84 percent late on Tuesday.

As a result, he said, that 2013 should be a year of repositioning for investors, advising a shift to shorter duration bonds – 2 to 4 year duration from 7 to 8 year -- which are less sensitive to interest rates change.

Contact World Economy

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