The recent Fed meeting was waited in excitement after Fed chair Powell in late August announced the Federal Reserve has shifted its monetary policy strategy to now aiming at achieving 2% inflation on average over some time - a new era in American monetary policy.
The main question was: would the Federal Reserve ease monetary policy to create more inflation or would it stick to its current policy stance and wait for inflation to come eventually?
The Federal Reserve meeting left markets with one question on Wednesday: is the glass half full or half empty? On one hand, the Fed was not as dovish, as Danske Bank's analysts expected, but on the other hand not as hawkish as others had expected.
After the Fed chair's press conference, markets cheered at first, but later reversed and ending the day with the ten-year breakeven inflation rate marginally lower than before the announcement. 'Basically, the message was 'keep calm and carry on', as the Federal Reserve will not raise rates until 2024 at the earliest,' says Mikael Olai Milhoj, senior analyst at Danske Bank.
It seems fair to assume that the Federal Reserve will increase the buying pace in case we see a setback in the recovery, a significant risk-off in markets and/or inflation expectations start to fall. This may even happen in-between meetings given the flexible nature of the Fed's QE programme.
Mikael Olai Milhoj
Senior analyst, Danske Bank
The answer to the half full-half empty question is, according to Mikael Olai Milhoj: it depends. On one hand, the glass can be seen as half empty. The updated projections showed that the Fed expects to maintain the current target range at 0.00-0.25% at least through 2023 and will continue to buy bonds 'at least at current pace'. In other words, the Federal Reserve has no intention tightening monetary policy anytime soon. Still, it was not enough to maintain market optimism.
'It seems fair to assume that the Federal Reserve will increase the buying pace in case we see a setback in the recovery, a significant risk-off in markets and/or inflation expectations start to fall. This may even happen in-between meetings given the flexible nature of the Fed's QE programme,' Mikael Olai Milhoj says.
Actions speak louder than words
On the other hand, the glass can be seen as half empty. The Federal Reserve had a great opportunity to show its determination in creating inflation and achieving its new goal by increasing the bond buying pace. 'Words mean a lot in monetary policy, but actions still speak louder. It is difficult to build credibility and it would be a very strong signal if the Fed had gone the extra mile,' Mikael Olai Milhoj says.
Overall, the senior analyst sees the lack of further easing as unfortunate, because economic research shows that monetary policy is more efficient if easing comes fast and forceful: 'the more you do now, the quicker you can also get out again.'
DANSKE BANK A/S 
