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With Europe dominating headlines, investors appear to be giving little thought to what could be either the biggest surprise or the biggest snooze of the day: the release of minutes from the April meeting of the Federal Open Market Committee of the Federal Reserve.At its last meeting on April 25, the Committee unsurprisingly decided to keep its federal funds rate target at an ultra-low 0.25 per cent. But board members’ projections for future interest rates proved far more important; on the whole, Fed members shifted forwards projections for the start of fiscal tightening.
That killed still strong investor hopes for QE3 by the end of June, meaning that the financial system will lack an important crutch once Operation Twist expires late next month.
However, many remain hopeful that continuing concerns about the pace of economic growth and the spillover effects of the eurozone debt crisis will prompt the Fed to reconsider.
Perhaps most importantly, we’ll be looking for any changes to the conditions necessary for another round of easing. In the last minutes release, FOMC members indicated that they would not pursue more quantitative easing unless growth slowed or inflation fell below 2 per cent.
We’ll also be looking for any indication that we’re approaching one of these benchmarks, particularly since recent data indicated that consumer prices had only grown by 2.3 per cent year-over-year, down from 2.7 per cent the previous month.
Further, we’ll also be probing any mentions of renewed concerns about Europe. Deteriorating economic conditions in the euro area have prompted strong Fed action in the past—they opened a dollar swap line program with other central banks as euro worries escalated last November—so investors will be interested in the Fed’s assessment of the current gravity of the problem.
But even without QE3, investors will just be looking for reassurance that easing is in at the Fed, amid some hawkish statements by governors recently. According to Bank of American Merrill Lynch analyst Michael S. Hanson, that shouldn’t be a problem:
It should go without saying that the Fed still remains very far from the exit, as noted by Chairman Bernanke and the core of the FOMC. Most of them see the exit strategy as a way to anchor inflation expectations, thereby helping give the Fed more latitude to respond to adverse shocks. Indeed, we still see an easing bias firmly in place at the Fed.
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