We originally published this yesterday, and are resurfacing it in light of today’s FOMC decision.The schedule goes like this:
- 12:30: FOMC decision
- 2:00 PM ET: FOMC projections released
- 2:15 PM ET: Bernanke press conference
We’ll be covering it all live
At its last meeting, the FOMC announced Operation Twist. Currently, markets don’t expect a major policy change to come out of the two-day FOMC meeting that begins today, on account of some relatively stable economic data. Though today’s ISM data was disappointing.
This time around, the focus is expected to be on inflation expectations, transparency and communication (regarding the Fed’s dual mandate of inflation and unemployment), and some clarity on its conditional-trigger policy.
Markets are also watching Chicago Fed President Charles Evans who had been calling for explicit benchmarks for raising interest rates.
Here’s what analysts expect:
The meeting is likely to focus on ongoing talks on easing tools and a new communications strategy, according to Societe Generale analyst Aneta Markowska.
At the centre of the communications debate–and the disagreement within the FOMC–is the belief that the Fed has focused more on the inflation side of its mandate, while falling short on its unemployment mandate. Chicago Fed. president Evans has been calling for a more equal treatment of both.
Greater transparency, with the aim of reducing uncertainty about the Fed’s reaction-function is a crucial part of this new communications strategy to help markets better interpret the impact of economic data on monetary policy.
Markowska says the next significant move she expects from the Fed is the introduction of a conditional-trigger policy, which would lead into QE3:
“The Fed needs to make a clear distinction between near-term thresholds for rate hikes and long-run objectives for unemployment and inflation. Clarifying the Fed’s long-term objections may in fact be the first step in the process and this could be done at this week’s FOMC meeting.
…Our baseline scenario sees QE3 implemented in late Q1/early Q2, with the Fed buying a combination of Treasuries and MBS securities.”
Recent economic data has not signaled an urgent need for easing and Joseph LaVorgna doesn’t expect a major policy change:
“In our view, the recent improvement in the economic data mitigates the likelihood of any significant policy changes; although, there could be some modest changes to the official meeting statement as the Committee tries to shift toward numerical data targets for the initiation of its exit policy, rather than a calendar target (mid-2013). Yesterday’s October Chicago PMI provided further evidence that the economy is not buckling in the face of heightened uncertainty, and today’s manufacturing ISM is expected to corroborate this view.”
Meanwhile he expects inflation to persist and says its impossible to know how much of the surge in food and energy prices was due to the weak dollar, or how much of the weak dollar was because of the Fed’s monetary policy.
Analysts Evan Brown and Gabriel de Kock believe that new easing measures are definitely on the table for the Fed. They anticipate MBS purchases in early 2012. They also expect major resistance to any expansion of the Fed’s balance sheet.